Page 1       TOP OF DOC
72–805 DTP






MAY 22, 2001

Serial No. 107–7

Printed for the use of the Committee on Agriculture
 Page 2       PREV PAGE       TOP OF DOC

For sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: (202) 512–1800  Fax: (202) 512–2250
Mail: Stop SSOP, Washington, DC 20402–0001

LARRY COMBEST, Texas, Chairman
    Vice Chairman
RICHARD W. POMBO, California
NICK SMITH, Michigan
FRANK D. LUCAS, Oklahoma
JOHN R. THUNE, South Dakota
BOB RILEY, Alabama
DOUG OSE, California
 Page 3       PREV PAGE       TOP OF DOC
ROBIN HAYES, North Carolina
SAM GRAVES, Missouri
MARK R. KENNEDY, Minnesota

    Ranking Minority Member
GARY A. CONDIT, California
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
TIM HOLDEN, Pennsylvania
MIKE McINTYRE, North Carolina
BOB ETHERIDGE, North Carolina
 Page 4       PREV PAGE       TOP OF DOC
KEN LUCAS, Kentucky
BARON P. HILL, Indiana
JOE BACA, California
RICK LARSEN, Washington
MIKE ROSS, Arkansas
RON KIND, Wisconsin
RONNIE SHOWS, Mississippi
Professional Staff

WILLIAM E. O'CONNER, JR., Staff Director
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director

Subcommittee on Livestock and Horticulture

RICHARD W. POMBO, California, Chairman
    Vice Chairman
 Page 5       PREV PAGE       TOP OF DOC
BOB RILEY, Alabama
     Ranking Minority Member
TIM HOLDEN, Pennsylvania
RICK LARSEN, Washington
MIKE ROSS, Arkansas
GARY A. CONDIT, California
CALVIN M. DOOLEY, California
BOB ETHERIDGE, North Carolina
CHRISTOPHER D'ARCY, Subcommittee Staff Director



    Green, Hon. Mark, a Representative in Congress from the State of Wisconsin, opening statement
Prepared statement
    Holden, Hon. Tim, a Representative in Congress from the Commonwealth of Pennsylvania, opening statement
 Page 6       PREV PAGE       TOP OF DOC
    Kind, Hon. Ron, a Representative in Congress from the State of Wisconsin, opening statement
Prepared statement
    Obey, Hon David R., a Representative in Congress from the State of Wisconsin, prepared statement
    Peterson, Hon. Collin C., a Representative in Congress from the State of Minnesota, opening statement
    Pombo, Hon. Richard W., a Representative in Congress from the State of California, opening statement
    Shows, Hon. Ronnie, a Representative in Congress from the State of Mississippi, opening statement

    Carinalli, Domenic, chairman of the board, Western United Dairymen, Petaluma, CA
Prepared statement
    Covington, Calvin, chief executive officer, Southeast Milk, Inc., representing the Southeast Dairy Farmers Association, Belleview, FL
Prepared statement
    DeJong, Donald, Texas Association of Dairymen, Austin, TX
Prepared statement
    den Dulk, Timothy, president, Continental Dairy Products, Coopersville, MI, representing Select Milk Producers; Continental Dairy Products; and Elite Milk Producers
Prepared statement
    Douma, Fred A., president, Milk Producers Council, Ontario, CAI6015
 Page 7       PREV PAGE       TOP OF DOC
Prepared statement
    Furth, Mark, general manager, Associated Milk Producers, Inc., New Ulm, MN
Prepared statement
    Lincoln, John, president, New York Farm Bureau Federation, Bloomfield, NY, representing the American Farm Bureau Federation
Prepared statement
    Tillison, Jim, chief executive officer, Alliance of Western Producers, Sacramento, CA
Prepared statement
    Tipton, Connie, senior group vice-president, International Dairy Foods Association
Prepared statement
Submitted material
Accompanied by: Bob Yonkers, chief economist, International Dairy Foods Association

Submitted Material
    Australian Dairy Corporation, statement

TUESDAY, MAY 22, 2001
House of Representatives,
Subcommittee on Livestock and Horticulture,
Committee on Agriculture,
Washington, DC.

 Page 8       PREV PAGE       TOP OF DOC
    The subcommittee met, pursuant to call, at 10 a.m., in room 1300, Longworth House Office Building, Hon. Richard W. Pombo (chairman of the subcommittee) presiding.
    Present: Representatives Goodlatte, Gutknecht, Pickering, Osborne, Pence, Putnam, Peterson, Holden, Boswell, Larsen, Condit, Dooley, Etheridge, and Stenholm [ex officio].
    Also present: Representatives Green of Wisconsin, Kind, and Shows.
    Staff present: Christopher D'Arcy, subcommittee staff director; John Goldberg, Callista Gingrich, chief clerk; Susanna Love, Andy Johnson, and John Riley.

    Mr. POMBO. Good morning. The meeting of the Subcommittee on Livestock and Horticulture to receive testimony on the future of the American dairy policy will come to order.
    Due to their expressed interest in the work of the subcommittee today, I would ask unanimous consent to allow Mr. Mark Green of Wisconsin, Mr. Ron Kind of Wisconsin and Mr. Ronnie Shows of Mississippi to sit with this subcommittee and to participate, should they desire to do so, without objection.
    Today's hearing is designed for this subcommittee to continue to exercise its oversight responsibility with regard to the ongoing reform of America's dairy industry and to prepare for the upcoming farm bill. The consideration of dairy as it relates to the next farm bill began this year on April 5 when the full committee held a hearing. My goal is to continue and broaden that discussion here today by listening to a wide range of witnesses. I am interested in hearing today from both witnesses and members about their vision for dairy in the upcoming years.
 Page 9       PREV PAGE       TOP OF DOC
    Understanding the big picture is especially critical when dealing with issues this complicated. America's dairy policies are a complicated patchwork involving many economic and regional variables. The reform of Federal dairy policy and the desire to transition to a more market-oriented approach to dairy has been a focus of this subcommittee.
    We have a good cross-section of America's dairy industry here today. I expect everyone to weigh in and be heard, and all should be prepared to engage in the kind of give-and-take that will, hopefully, provide me and my colleagues with valuable insight as we craft the next farm bill. This is especially important for many of my colleagues on this subcommittee. This will be their first opportunity to consider a farm bill as a Member of Congress.
    As I have said before, I know it is unrealistic to expect America's dairy industry to speak with one voice, at least today. I do continue to hope, however, that these different voices can be in greater harmony. Parochial, regional and often narrow perspectives have too often diluted the ability of the dairy industry to influence and contribute to the national debate on the future of American agriculture. For that reason, I appreciate the recent efforts of industry leaders, such as the work of the National Dairy Producers conclaves to focus on areas of agreement and cooperation. Industry consensus in dairy goes a long way to producing political consensus.
    I look forward to receiving today's testimony, and I welcome all of our witnesses and guests here this morning.
    With that, I will yield to our ranking member, Mr. Peterson, for an opening statement.
    Mr. PETERSON. Thank you, Mr. Chairman. I won't take a lot of time, but I welcome everybody to the meeting. And now that it is apparently the situation that we are going to try to rewrite the farm bill, I think it is imperative that we try to figure out a way that we can make some changes in the dairy part of the farm bill as we move forward in this process. And I just think it is time that we figure out a way that we can come together and make some changes that are going to get us out of this system that we have been in where we have these highs and lows that are just killing our dairy producers.
 Page 10       PREV PAGE       TOP OF DOC
    I don't have any strong feelings about how that needs to get done exactly, but we just can't keep on with a system that is going to have the ups and downs in it that we have seen the last few years. These $10 crises for long periods of time are driving producers out, I think unnecessarily, and we have got to figure out some way to come together as a Congress and as an industry to figure out how to come up with a system to take these highs and lows out of the system.
    I don't personally believe that compacts are the way to do that. I think they are kind of papering over the underlying problems that we have in the underlying system; we have just got to figure out a way to change this system to come into the situation that we are in right now. The old price support system just isn't working, obviously, because we keep having these highs and lows, and we don't seem to be able to figure out a way to get away from that.
    So that is what I would like to see us do, Mr. Chairman.
    I would like to ask the people that represent the dairy interests in this country to work with the chairman and myself and this committee to try to figure out a way that we can update the dairy policy in this country so we can have more stable market conditions for our producers and maintain a vibrant industry in the country.
    So I look forward to the testimony today and hope that we can all figure out a way over the next few months to get together and try to come up with some innovative ideas, to come up with a system that will more adequately help our producers.
    I would also like to welcome Mr. Mark Furth from AMPI of Minnesota. I believe is one of the people that is with us today. We appreciate him being here and his leadership in Minnesota and our part of the country.
    So thank you, Mr. Chairman, and I look forward to the testimony.
    Mr. POMBO. Are there further opening statements?
    Mr. Green.
 Page 11       PREV PAGE       TOP OF DOC
    Mr. GREEN. Thank you, Mr. Chairman. First off, thank you for the opportunity to sit in today. I appreciate it very much. If I may, I will submit a written statement for the record and just summarize a few thoughts here.
    Also let me say, I appreciate your comments, opening comments, and reference to some of our regional and parochial issues that have dominated dairy policy for so long. From the perspective of the upper Midwest, we view that as being perhaps the crucial problem. Obviously, there are a lot of troubles in our dairy industry right now in America, but while it may be a matter of trouble and challenge for our dairy industry nationwide, for the upper Midwest it is a matter of survival.
    There is a lot of talk about the crisis facing the Nation, but with respect to the State of Wisconsin, for example, which still goes by the moniker of ''America's Dairyland,'' by this time tomorrow it is very likely that Wisconsin will have lost four more dairy farms. Over the last 10 years, we have lost about 13,000 dairy farms. So over the last decade, my home State has lost more dairy farms than any other State besides Minnesota ever had. So while it is matter of challenge in many parts of the country, it is a matter of crisis and catastrophe and upheaval in my home State.
    If our losses were due purely to forces of nature or inherent competitive challenges, while the losses would be no less tragic, they would perhaps be a little more understandable in the sense that farmers across the Nation know that they are inherently in a risky business and a risky way of life.
    The problem from the perspective of the upper Midwest, however, is that our challenges are almost entirely Government-imposed, anticompetitive policies from the Milk Marketing Orders, created 60-plus years ago, to the more recent Northeast Dairy Compact. It is Government policy that really has caused a crisis that we are facing.
 Page 12       PREV PAGE       TOP OF DOC
    The Milk Marketing Order System was created for some very positive, good reasons in order to ensure a fresh supply of milk to many parts of the Nation at a time when there were only two or three surplus dairy States in the Nation—Minnesota, Wisconsin being two of them—but since 1937 when the Milk Marketing Order System was created, things have changed a little bit in our country, technology-wise, economically.
    We now have 35 dairy surplus States in this Nation. We have such an amazing thing as refrigerated trucks. We have an interstate highway system. We have the ability to ensure a fresh supply of milk all across the country and, yet, these outdated policies which chose to subsidize farmers in one or two regions of the country at the expense of the upper Midwest continue.
    So I would certainly encourage the members of the committee, as we receive testimony today and as you all go forward in your deliberations, to take a very close look at these outdated, Government-imposed policies which are punishing farmers in many parts of the country, which are forcing farmers to succeed at the others' expense. I would ask you to look at those very closely because, again, in my neck of the woods, it is matter of crisis and upheaval.
    With that, Mr. Chairman, I will submit a statement for the record. Thank you.
    Thank you Mr. Chairman for this great opportunity to offer a few thoughts on what is taking place in our Nnation's dairy industry. This is obviously an issue of great importance to consumers and dairy producers all across America. Rest assured, however, that it is an issue of survival to dairy producers in the upper Midwest.
    I know that you are going to broadly examine our Nation's dairy policies through this subcommittee. I believe you will find clear evidence that Federal regulations, including our current milk marketing orders and the Northeast dairy compact, are having a dramatic negative impact on midwestern dairy farmers.
 Page 13       PREV PAGE       TOP OF DOC
    Mr. Chairman, as we all know, farmers all across the Nation are suffering economically. In 1999 when Congress moved to undo the U.S. Department of Agriculture's very modest dairy reform rules, the effort was led by members of the House and Senate sincerely trying to address the financial pain their dairy farmers were experiencing. But what many did not realize was (a) the crisis facing upper Midwest dairy producers was and is much worse than anywhere else or (b) that overturning the USDA's modest reform plan would only extend and deepen that crisis.
    When I say that the upper Midwest problem is the worst in the Nation, I am not exaggerating. By this time tomorrow, Wisconsin will likely have lost four more dairy farms. In the last 10 years, my State has lost over 13,000 dairy farms. Or, put another way, over the last decade, Wisconsin has lost more dairy farms than almost any other State ever had.
    If Wisconsin's losses were due to inherent competitive forces or even forces of nature, while the losses would be no less tragic, they could be chalked up to age old risks of farm life. But that's not the case. Minnesota and Wisconsin's dairy farm losses are due almost entirely to Government imposed anti-competitive barriers—barriers that favor some dairy producers in some parts of the country at the expense of those in the upper Midwest.
    The worst of these anti-competitive barriers are: the decades-old milk marketing order system and the more recent Northeast Dairy Compact.
    As many on this committee know, today's milk marketing order system was originally developed in 1937 when the State of Wisconsin was the largest dairy producer in the country and most States were deficit producing dairy States. In 1937, it was difficult to transport drinkable milk across the country. Price incentives were thus created to spur dairy production in deficit States. The system mandated that dairy producers receive more for their milk depending on how far their farming operation was from Eau Claire, Wisconsin.
    Of course, technology has radically changed nearly every facet of life since the 1930's. Today we have refrigerated trucks and an infrastructure that allows us to rapidly and efficiently move milk from one region to another. We now have 35 States producing dairy surpluses—there is no area of the United States that doesn't have easy access to fresh milk. Many things have changed since 1937, but the Milk Marketing Order Program has remained the same.
 Page 14       PREV PAGE       TOP OF DOC
    I would like to ask my colleagues on this committee if they truly believe it makes sense to price milk based upon its distance from Eau Claire, WI or the upper Midwest? If you believe as I do, and as everyday Americans do, that it is fundamentally wrong to price a product based on its distance from a surplus producing area, then you recognize the need to reform this inequitable and obsolete system.
    The second obnoxious governmental barrier to efficient dairy production and fair competition is the Northeast Dairy Compact and, of course, the misguided efforts of some to create new compacts.
    Compacts are little more than multi-state cartels that artificially inflate the price of milk by limiting competition from more efficient producers outside the compact area. These arrangements make it impossible to conduct fair and open trade between states. In fact, they are by their very nature designed to restrict interstate commerce.
    It is my firm belief that dairy compacts violate the fundamental tenets of the commerce clause of the Constitution. While Congress is granted the authority to regulate commerce among several States, we seem to have forgotten that the commerce clause also limits the power States have to discriminate against interstate commerce.
     Compacts establish a minimum price for milk that processors must pay dairy producers in the compact region. Processors within the compact are prohibited from buying milk from producers outside of the compact region at a lower price than the minimum compact price, and they prohibit processors outside the compact from shipping milk into the compact area unless the processor paid at least the minimum compact price. To put it simply: this is nothing more than a milk tariff, a milk tax imposed by one State or compact region on another region. Instead of facilitating commerce between the States, it creates economic protectionism at the expense of national consumers and healthy competition.
    Dairy compacts increase the costs to consumers in the compact region and drive down consumption rates of dairy products. Economists have indicated that a 10 percent increase in the retail price of milk can lead to as much as 8 percent decline in milk consumption. When the Northeast Dairy Compact was established consumers were required to pay an additional 22 cents per gallon of milk. According to the Consumer Federation of America, if the Northeast Dairy Compact is extended and a Southern Dairy Compact is authorized consumers can expect to pay an additional $485.2 million for the milk they drink in the first 6 months of the compacts. These increased costs will result in declines in the milk consumption rates.
 Page 15       PREV PAGE       TOP OF DOC
    Dairy compacts can also penalize dairy producers in states outside the compact. Inflated milk prices spur overproduction of milk. As a result of the Northeast Dairy Compact, milk production grew at a rate of 9 percent during the first half of fiscal year 1998.
    As we all know, milk lacks a long shelf-life. As a result, compact surpluses are converted to cheese, butter and milk powder. These surpluses are then exported to non-compact States which, because market influences are at play, increase supplies and drive down costs for producers. In this respect, compacts hit dairy producers twice—once by restricting access to compact markets and a second time when compact surpluses depress prices in non-compact States.
    Finally, isn't it amazing that at a time when this Congress and this administration are pushing for freer trade, for the dropping of tariffs and import barriers between the United States and other nations, the official dairy policy of this Nation is to preserve trade barriers between States and regions. What Hypocrisy!
    No wonder our dairy farmers are so frustrated with politicians.
    The Northeast Dairy Compact is due to expire this year. For goodness sake, let it. Then lets get to the business of real reform that benefits all producers—not just a small number at the expense of others.
    Mr. POMBO. Thank you.
    Mr. POMBO. Mr. Holden
    Mr. HOLDEN. Mr. Chairman, I too want to thank you for your opening statement and for holding this hearing today, because as you mentioned, we do have a very diverse dairy interest across this country. And like my friend from Wisconsin, we in Pennsylvania also have suffered the loss of thousands and thousands of dairy farms, and we need to try to find a consensus and try to allow our friends, who work so hard in dairy farming, to be able to stay in business and pass their farm on from generation to generation.
 Page 16       PREV PAGE       TOP OF DOC
    I am hoping that we are going to be able to do that, but we have very diverse interests. As my good friend from Minnesota said, he believes compacts are not the way to go. I have to say, I respectfully disagree with that. My farmers in Pennsylvania are very anxious for the reauthorization and the extension of the compact in the northeast to include New York and Pennsylvania, because we believe it has been a successful story to tell and it has helped farmers and has not hurt consumers.
    So, again, Mr. Chairman, I want to thank you for holding this hearing. We do have diverse interests. Hopefully, we will be able to try to find some consensus as we move forward. Thank you.
    Mr. POMBO. Mr. Kind.
    Mr. KIND. Thank you, Mr. Chairman. I will be brief. First of all, I want to thank you and the ranking member for agreeing to hold this hearing, a very important hearing. Obviously, we have Mr. Green, one of my colleagues from Wisconsin. My district is still one of the largest dairy producing districts.
    First, the good news, though: the Milwaukee Bucks are in the conference finals, and we are hoping to have a chance to play in Los Angeles later.
    Mr. HOLDEN. Playing the Sixers, I understand.
    Mr. KIND. I was hoping you wouldn't notice that.
    But I have a written statement I would like to submit for the record with unanimous consent.
    I have introduced legislation calling for a counter-cyclical program for our dairy producers, but again my concern right now is, a lot of attention has been given to compacts early on. I hope that we don't use this as a point of dividing the committee and the work that we need to do on dairy policy, and we can find some areas of common agreement, because I think there are many, many areas of common agreement if we take time to listen to each other's concerns, try to craft a good farm policy, one that is especially going to impact our dairy farmers throughout the country regardless of region or what they might be producing. I just hate to see us get bogged down now on an issue that has tended to divide the Congress, rather than working on issues we can come together on.
 Page 17       PREV PAGE       TOP OF DOC
    Hopefully, we will have a good conservation part of the farm bill, one that I think will be well received in virtually every region of the country. We have a serious crisis with the problem, with Johne's disease affecting milk production. It doesn't have a consumer impact, but does have a impact on the production capabilities of the dairy farmers.
    I think we need to look at some long-term solutions with that, but again we have a lot of work to do to bring consensus to this committee and the Congress.
    I appreciate the witnesses, their attendance and their testimony here today, and look forward to working with my colleagues to try to find a common solution. Thank you.
    Thank you Chairman Pombo, Ranking Member Peterson and other members of the Livestock and Horticulture Subcommittee for the opportunity to present testimony before this distinguished body.
    Today, I would like to take a few moments to describe bold, innovative dairy legislation that I introduced last week. H.R. 1878 is similar to legislation I introduced in the last Congress—H.R. 5051—that pays dairy farmers incentive payments on all classes of milk whenever the market price dips below $12.50 per hundredweight. This new legislation, H.R. 1878, improves on the last Congress' measure by adding a simple and straight-forward inventory management
    provision designed to help farmers avoid the price-depressing effects of future milk surpluses.
    As we all know, dairy is a highly controversial issue, often times pitting region-against-region and farmer-against-farmer. It is time we end this regional fight and bring our family farmers together with a national approach that treats all producers fairly and equitably. Despite the well-intentioned, regional disputes, one thing is clear—family dairy farmers from across the Nation are hurting; especially when prices have recently been at over 20-year lows. Thousands of family farms are forced out of business each year and our rural communities in all regions suffer as well. In Wisconsin, we are losing four to five family dairy farms a day in our State alone.
 Page 18       PREV PAGE       TOP OF DOC
    H.R. 1878 will help promote strong and vibrant family dairy farms. With the multiplier effect of dairy farm dollars, this bill will provide a major economic boost to farm equipment dealers, hardware stores, veterinarians, banks and many other rural businesses, as well as to our schools, churches and other rural institutions. H.R. 1878 is right for America.
    H.R. 1878 is quite simple. It provides for greater income in dairy production by creating a $12.50 per hundredweight target price for all classes of milk. Importantly, this legislation is market reflecting, not market distorting. Moreover, this legislation makes the dairy program more consistent with Federal programs for other commodities and is counter-cyclical. Similar to the loan deficiency payment for wheat and feed grains, which is strongly supported by members from both political parties, dairy farmers will receive payments only when the market price falls below the target price. Hence, in good times, when prices are greater than $12.50 per hundredweight, producers will not receive a payment. In times of poor prices, the size of payment will be linked to the difference between the target price and market price. Payments would be made monthly, not annually, as is the case under the dairy transition payment.
    By treating all dairy farmers across the Nation equally through a targeted price on all classes of milk, H.R. 1878 avoids the regionally divisive battles among producers with widely varying utilization differences. H.R. 1878 applies to all milk regardless of whether it was produced under a Federal milk marketing order, a state milk marketing order, or an unregulated market.
    H.R. 1878 is also sensitive to the need to target benefits to medium- and-small-sized dairy producers. Producers are eligible to receive the target price benefits on up-to 2.6 million pounds produced annually. This production level is equal to roughly 130 Holstein cows producing 20,000 pounds of milk annually. Such a production level reflects the industries in the Northeast, Southeast, and Midwest. Larger operators in these regions as well as the West would all receive the same level of benefits from this legislation.
 Page 19       PREV PAGE       TOP OF DOC
    H.R. 1878 also includes an innovative and straightforward inventory management provision. This key feature helps dairy farmers avoid future periods of over-production like the recent supply surge that contributed to the lowest manufacturing milk prices in more than two decades. Under this provision in H.R. 1878, each farm, which held its production to the level of its 2-year base history, would receive an additional 50-cent per hundredweight incentive payment. It is important to note that producers from all regions of the country regardless of size can participate without limitation in the 50-cent per hundredweight inventory management payment provision.
    This proposal received enthusiastic and broad bipartisan and multi-regional support. With the additional of the inventory management provision, I believe that this measure is even stronger and more responsive to the needs of America's hard-pressed dairy farm families than ever before. I urge this subcommittee to look favorably on this measure and to work with me in making H.R. 1878 a reality at the earliest possible date.
    As Members of Congress from rural, dairy-intensive districts, we must also remember that healthy, vibrant family dairy farms are a vital economic, social and cultural resource that is at risk. Sadly, this Nation takes this resource for granted and fail to fully appreciate the vital role that dairy farmers play in every consumer's daily life. Dairy is an important part of our economy. If we fail to safeguard this vital resource entering the new century, America risks losing the family dairy farms that have made us so strong. My legislation safeguards this precious resource. I urge its quick approval.
    Thank you for the opportunity to join this morning.
    Mr. POMBO. Mr. Shows.
    Mr. SHOWS. Thank you, Mr. Chairman. I appreciate the opportunity to be on your subcommittee this morning. But I would like to make an opening statement.
 Page 20       PREV PAGE       TOP OF DOC
    The Fourth Congressional District of Mississippi, the district I represent, is the largest producer of milk in the State of Mississippi, so it is a vital subject to me. And we know these are troubling times for these farmers in not only my district, but everybody else's district; they have suffered volatile prices, unfair foreign competition, soaring energy costs. I know how difficult it is to be a dairy farmer, and I sympathize with the ongoing struggle to support their families.
    I am here today to encourage my colleagues to unite in defense of our dairy farmers. The dairy industry has always required Government intervention due to the perishable nature of milk and milk products. In the past, Congress has had the foresight to protect this important domestic product.
    We must protect farmers' livelihood and their families from the market uncertainties that have caused untold tragedies in my district and throughout the Nation. This means supporting our current Milk Marketing Order System and maintaining the dairy purchase price at $9.90 per hundredweight. In terms of foreign trade, it means taking a firm stand on reducing the importation of massive amounts of milk protein concentrate and continuing to support common-sense ideas like the Dairy Export Incentives and Market Access Programs.
    In addition, we must renew our commitment to protecting our livestock from the threat of domestic- and foreign-borne animal diseases. This also means encouraging regional solutions to regional price fluctuations.
    We must guarantee every American consumer fresh and reliable local milk supplies. We need to pass H.R. 1827, the Dairy Consumers and Producers Protection Act of 2001, and give our farmers the ability to protect their regional prices, but yet not prohibit regional trade. As we review our national dairy policy, we must not leave our farmers and our rural economy out. We will sorely regret the consequences of those actions if that happens.
    Thank you, Mr. Chairman. I appreciate the opportunity to be here this morning.
 Page 21       PREV PAGE       TOP OF DOC
    Mr. POMBO. Thank you.
    Mr. PETERSON. I would ask that the statement of Mr. Obey from Wisconsin be added to the record. He is, as you know, very interested in this.
    Mr. POMBO. Without objection.
    [The prepared statement of Mr. Obey follows:]

    Mr. Chairman, Ranking Member Peterson, members of the committee:
    Thank you for the opportunity to address you today. You have a tough job on your hands because current dairy policy is a failure on all fronts. We have a dairy program that is failing farmers, failing consumers and failing taxpayers. Dairy farmers are going out of business in record numbers, 10 or 11 a day in the upper Midwest alone, because we've seen an extended period of record low farm milk prices over the past 18 months. Consumers are getting ripped off. They are not seeing any benefits when you have stores in Chicago charging $4 for a gallon of milk while farmers are getting the lowest prices in 24 years. And, taxpayers are getting squeezed with estimates for the cost of the milk price support program ballooning to nearly $700 million last year and more than $1.2 billion this year.
    There's nothing unique about the dairy program. The same dynamic can be seen throughout the farm sector.
    Meanwhile, the so-called Freedom to Farm Act has done nothing to encourage our farm sector to become more market-oriented. In the case of dairy, the modest proposals offered by Secretary Glickman to institute a more market-oriented milk marketing order system were blocked, twice, by this Congress. So much for free markets.
    I expect there is very little this committee or this Congress will do to change that. I have very low expectations of any major reform of the milk marketing order system, the principal source of the price discrimination suffered by farmers in the upper Midwest. I have little reason to believe this committee or this Congress will come up with a rational plan for resolving the problem of oversupply and low prices that might include supply management, despite the fact that Canada, Europe, California and even the Northeast Dairy Compact all employ some form of supply management for their dairy industries.
 Page 22       PREV PAGE       TOP OF DOC
    However, there are some steps I would hope that you would at least consider because they are the absolute minimum that the dairy industry should expect.
    Expiration of the Dairy Price Support Program. The first is to extend the Dairy Price Support Program which expires at the end of this year. Under the 1996 farm bill, the price support program was scheduled to expire at the end of 1999 and be replaced by a recourse loan program for dairy manufacturers. That hasn't happened because the Appropriations Committee has extended it for each of the past 2 years. I wish I could say that this was a considered policy judgement of the committee, but it wasn't. Very simply, under the dumb budget rules that govern our legislating, we saved some money each of the past 2 years by extending the program. That's because it was less costly to keep the program going than it was to end it and set up the recourse loan program.
    This year that is no longer true because purchases of surplus dairy products, mostly nonfat dry milk, have grown sharply in recent months and it is costing the Commodity Credit Corporation a lot of money.
    According to the latest estimate I received from the CBO, an extension of the Dairy Price Support Program through 2002 would add $59 million to the cost of the dairy program above baseline projections of $238 million, and in 2003 that cost would rise to $158 million above baseline projections of $100 million.
    2002 CBO Baseline: $238 million
    Price Support Program Extension +$59 million
    2003 CBO Baseline: $100 million
    Price Support Program Extension +$158 million

    Now, clearly, these baseline projections are out of whack. They don't come close to reflecting the cost of the Dairy Program over the past 3 years which has ranged from $480 million in fiscal year 1999 to $1.2 billion estimated for the current fiscal year. We should reject these baselines and our actions should be driven by what makes sound policy sense.
 Page 23       PREV PAGE       TOP OF DOC
    Now, I believe we should extend the price support program because it is the only dairy safety net there is. Admittedly, it's a safety net that for too many farmers and for too many years has been dragging along the ground because it's way too low. But, with world dairy prices around $6 per hundredweight, the low prices we've seen for much the past few years will fall even further.
    Milk Protein Concentrate—Solution to Price Support Program Costs. There is, perhaps, a simple solution to this problem that will save taxpayers money while retaining the safety net for dairy farmers. And, the good news is, that it doesn't create any regional fights. We can do it by closing the Milk Protein Concentrate (MPC) tariff loophole, as Congressman Gutknecht and I have proposed.
    I won't go into the details of the problem other than to note that I commissioned a CBO report last year into the problem. CBO reported that, unlike all other dairy products, MPCs come in with virtually no import restrictions due to the fact that there was little or no MPC around when the GATT was negotiated. However, MPC production in places like the European Union, Australia and New Zealand have increased dramatically, and exporters in those countries have exploited the loophole in the tariff schedules to bring them into the U.S. in rapidly growing amounts.
    According to National Milk, these imports are displacing domestically-produced nonfat dry milk and, as such, may account for as much as half of the CCC purchases of nonfat dry milk, costing taxpayers as much as $200-$300 million. If we close the MPC loophole, less NFDM will be displaced, the will be less surplus production and fewer purchases by the CCC. This alone may provide the savings we need to extend the dairy price support program.
    Now, I recognize that this committee does not have jurisdiction over tariffs. But, it would be tremendously helpful if this committee would go on record as supporting the legislation and convey that support to the Ways and Means Committee.
 Page 24       PREV PAGE       TOP OF DOC
    Regional Dairy Fights. As I said, this action is endorsed by dairy farmers across the nation. There is no regional division on this as there is on so many other dairy issues. It is my hope that we can avoid any further regional battles and seek solutions to low prices that benefit all dairy farmers regardless of where they happen to live in the United States.
    It is ironic that many of those who are so fervent in their endorsement of global free trade wish to establish barriers to the movement of dairy products here at home. I recognize that milk marketing orders already do that. It is my view that we should get rid of the marketing orders because they are outdated, and unfair to farmers in my region. If we cannot do that, we should at least not make the problem worse. We should, if we do nothing else, allow the Northeast Dairy Compact to expire, as it is due to, in September of this year.
    Supplemental Dairy Payments. I made reference to seeking solutions that are fair to all farmers regardless of where they live, and I am glad to note that this is exactly what Senator Kohl and I have done for the past 3 years in championing the Dairy Market Loss Assistance program (DMLA). Under this program, dairy farmers across the Nation have received almost $1 billion in supplemental payments over the past three years to help offset low prices. While Congress left it to the discretion of USDA to determine how to distribute those payments, Senator Kohl and I have worked with USDA to ensure that they don't deny those payments to any farmer wherever they live and however big or small they are. Everyone is eligible for payments. The only restriction is that there is a cap on how much any one farmer may receive, and I believe that is appropriate to ensure that payments are targeted at smaller farmers that need the help the most.
    Frankly, I don't believe that this is good policy and, despite what some of you may believe, I especially don't like the process by which we have enacted this program. It is not the responsibility of the Appropriations Committee to legislate dairy policy. I would much rather that this committee take action. Sadly, despite 24-year low prices, you have chosen not to act; so we on the Appropriations Committee did.
 Page 25       PREV PAGE       TOP OF DOC
    Kind Dairy Bill. I hope that this year you will act on legislation that provides a better safety net for dairy farmers and which does so without picking regional winners and losers.
    I would recommend that you look at, for example, the bill recently introduced by Congressman Ron Kind. That legislation will provide supplemental payments in any month when prices fall below a target price of $12.50 per hundredweight over a 3-month period, regardless of what class of milk they produce, whether its fluid milk, milk that goes into butter or powder, or milk that goes into cheese production.
    Supply Management. I would note that this legislation includes a supply management provision, with an incentive payment to producers who keep production in check. I think that is appropriate. In fact, on this point, I have been listening to Collin Peterson, a distinguished member of this panel. I agree wholeheartedly with his comments, that a strong supply management component must be part of any dairy policy if we are to guarantee a reasonable price to farmers without fleecing taxpayers.
    Global Free Trade. Some have suggested that supply management may not be legal under GATT. I would argue that there is no reason why it need not be legal, as long as it is designed appropriately. As you know, GATT rules establish a number of ''boxes'' for classifying farm program supports. I think that it is pretty clear that we can devise a supply management plan that will fit into GATT's category of a blue box, exempt from GATT prohibitions. This would constitute a direct payment under a production limiting program based upon a fixed number of dairy cows. The Kind bill complies with that. I believe we can develop a tougher bill that would comply also.
    It appears that agriculture is the only commodity where, when you have saturated the market, you don't cut back on production. The auto industry does it. The oil industry certainly does it. With farmers, you have some many independent actors that their response to low prices is to increase production. That simply feeds the problem of low prices and they end up chasing their tails.
 Page 26       PREV PAGE       TOP OF DOC
    As I noted earlier in my testimony, they have a supply management program in Canada. They have a supply management program in Europe. They have a supply management program in California. They even have a supply management program under the Northeast Dairy Compact. Even New Zealand, which holds itself out as a beacon of unfettered dairy production and trade, uses a monopoly State Trading Enterprise to aggressively manage the purchase and sale of New Zealand dairy farmer production. If supply management is good enough for those folks, then we should at least consider it for all American dairy farmers.
    Freedom to Farm Has Failed. I think by anyone's standard, the 1996 farm bill has been a colossal failure. It was supposed to make farmers more prosperous by giving them greater flexibility in planting decisions and cost taxpayers less. Instead, at the same time that basic commodity prices are at record lows, the cost of the farm program has exploded. Farm program supports cost no more than $3 billion when Jimmy Carter was President. In the year before Freedom to Farm subsidies were about $7.3 billion. Last year, they were $23 billion. Despite that, a depression rages throughout rural America.
    Farmers and taxpayers alike are taking it in the chops. We must change that.
    I appreciate you allowing me this opportunity to make the case for sound dairy policies.

    Mr. POMBO. I would like to invite our first panel of witnesses to come up to the witness table: Mr. John Lincoln, Mr. Domenic Carinalli, Mr. Fred Douma, Ms. Constance E. Tipton, who is accompanied by Dr. Bob Yonkers, if you would join us.
     Your entire written statements will be included in the record. I would like to request that you summarize your oral testimony.
    And many of you have had the opportunity to testify before. For those that have not, the lights in front of you will give you 5 minutes. When it turns yellow, it is time to summarize or finish up, and when it turns red, I would appreciate it if you would stop at that point.
 Page 27       PREV PAGE       TOP OF DOC
    There will be ample time for questions and answers after that, but your entire written testimony will be in the record.
    Mr. Lincoln, if you are ready, you can begin.


    Mr. LINCOLN. Good morning, Mr. Chairman, members of the committee. My name is John Lincoln. My wife, Anne, and I own and operate Lincoln Farm in Bloomfield, NY. Lincoln Farm is a registered Holstein dairy farm, and the milk produced is marketed through Upstate Farms Milk Cooperative. I am president of the New York Farm Bureau and serve on the American Farm Bureau board of directors.
    The American Farm Bureau Federation represents more than 5 million member families in all 50 States and Puerto Rico. It is significant to note that milk is one of the very few agricultural commodities produced in all 50 States and Puerto Rico, and that Farm Bureau is a major presence in each of these States with milk producers across the country.
    We appreciate the opportunity to once again discuss Farm Bureau's recommendations for the future of dairy policy. While we presented some details in relation to dairy on February 28, 2001, we believe that the dairy sector provides unique situations compared to other sectors of agriculture and, therefore, requires unique solutions. Since milk is highly perishable, does not store easily and requires special handling, farmers must market their product virtually every day of the year regardless of market price at the moment. This has, generally speaking, required more Government intervention than required by most commodities.
    Since the enactment of the Agricultural Act of 1949, milk prices have been supported by the Government. Since 1981, the support level has been established by Congress either at specific minimum price levels or by a formula tied to the anticipated Commodity Credit Corporation dairy purchases. Since January 1, 1999 the support price for milk containing 3.67 percent butterfat has been $9.90. The current program is scheduled to end on December 31, 2001.
 Page 28       PREV PAGE       TOP OF DOC
    It is imperative that the dairy price support be reauthorized at $9.90 per hundredweight prior to October. This would make the dairy program consistent with other commodity programs and maintain a safety net for dairy producers. A related issue is the butter-powder tilt. such an adjustment would have a severe impact upon total dairy producer prices and total dairy farmer incomes.
    However, the new Federal orders effectively changed the way that the price support and Federal order programs were enacted. A recent result has been, class IV has been driving all but the class III price. This makes the majority of producer income directly tied to butter market prices and the CCC purchase price for nonfat dry milk. Therefore, we ask the butter-powder tilt not be adjusted for the Dairy Price Support Program.
    Farm Bureau supports S. 847 and H.R. 1786, the Milk Protein Concentrate Dairy Trade bill. CCC purchases of nonfat dry milk are, in part, due to displacement of domestically produced nonfat dry milk by unrestricted imports of the milk protein concentrate and casein. We, in fact, have had an open market in the United States on imports, and we need to have those imports limited.
    In addition, Farm Bureau supports H.R. 1016, which would prohibit the Food and Drug Administration from changing the cheese standards to allow the use of dried ultra-filtered milk concentrate in cheese making.
    Farm Bureau supports extension and expansion of the Northeast Dairy Compact and authorization of the Southeast Dairy Compact. Contrary to some comments, it is a counter-cyclical program; it does take the lows, in particular, out of producer pay prices. It has been very effective in the six New England States, and producers have benefited from the compact.
    We realize, Mr. Chairman, this committee does not have jurisdiction over the Dairy Compact, but the issue is very important to our dairy producer members, and Farm Bureau supports H.R.1827. In addition, we support the DEIP Program, Market Access Program, Foreign Market Development Program, the P.L. 480 need to be fully funded.
 Page 29       PREV PAGE       TOP OF DOC
    Farm Bureau supports the Animal Health Protection Act.
    We appreciate your leadership, Mr. Chairman and Representative Peterson, on these issues and look forward to working with you to pass this important legislation this year. As you know, several incidents, such as the foot-and-mouth outbreaks in Europe and BSE issue in our own, the Johne's disease here in this country, make it imperative that USDA act quickly and decisively to ensure against any possible outbreak.
    Farm Bureau is extremely concerned about the cost that the proposed TMDL rules and regulations and the new proposed AFO/CAFO regulations will put on dairy and livestock producers. We will be testifying before the Conservation, Credit, Rural Development and Research Subcommittee tomorrow on conservation issues important to our members.
    Mr. Chairman, Farm Bureau appreciates the opportunity to testify in these issues important to our dairy producers today and we look forward to working with you as you craft a dairy title for the next farm bill. Thank you.
    [The prepared statement of Mr. Lincoln appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you. Mr. Carinalli.

    Mr. CARINALLI. Good morning, Mr. Chairman, Ranking Member Peterson, members of the subcommittee. My name is Domenic Carinalli. I am president of the board of directors of the Western United Dairymen, the largest producer trade association in the country's No. 1 dairy State. We represent approximately 1,100 of the 2,000 producers on a broad range of issues, including pricing, environmental quality, labor relations, public relations and advocacy.
 Page 30       PREV PAGE       TOP OF DOC
    Western United Dairymen believe the American dairy producer must aggressively seek new avenues of generating dollars for the marketplace and, in the future, place less reliance on taxpayer support.
    The industry, like all other industries today, exists and must compete in the global market. However, the market that exists outside our border is highly subsidized and often erects borders to competition from the United States. If these barriers to fair competition are not toppled of their own accord, then aggressive Government assistance from the United States in the form of market promotion is the best hope of American producers that foreign demand for our product will overcome trade barriers set up by other governments.
    Since most of the people live outside the United States, tremendous opportunity, as well as revenues, can be captured through aggressive marketing of our products overseas. Western United supports full funding of DEIP, the Market Access Program and the Foreign Market Development Program.
    The domestic market cannot be overlooked as a significant source of new revenue. Demand for American butter and cheese continues to expand at a rapid rate. The market for fluid milk has been identified as mature, but many producers feel that it is a market still waiting to be tapped.
    As this chart, attached, indicates, according to USDA, both the solids not fat and the butterfat included in milk as it comes directly from the cow is much higher than the Federal standards for fluid milk, at least 5 to 12 percent respectively. It makes no sense to allow the Federal standards to be so far below the level at which milk actually comes from the cow.
    Research shows that consumers, especially young consumers, are less likely to be milk drinkers if they have a negative experience when they consume our product. It is high time that the standards evolve as the industry has evolved and allow us to attain and retain more consumers with a more consistent product that is more wholesome, nutritious and satisfying to the consumers. More satisfied consumers equates to additional dollars from the marketplace.
 Page 31       PREV PAGE       TOP OF DOC
    However, it does little good to have standards of any product unless these product standards are enforced. Also, the Federal Government has an interest in making sure these standards are enforced. More consistent milk in schools, for instance, would likely make young children more dedicated milk consumers, improving their health. Ensuring standardized product also helps assure that product taxpayers are paying for as part of the National Feeding Program is really in the packages.
    Western United specifically asks, as we have previously proposed to the Secretary of Agriculture and as we propose to the committee today, that the Federal Government use its authority to contractually enforce fluid standards for milk in any National Feeding Program. This would include the National School Lunch Program, the WIC Program and the Food Stamp Program.
    Current regulations require compliance with standards, but no provisions are made for enforcement. As our California experience with the Shamrock Foods case indicated, absent enforcement, the taxpayers may well end up paying for the same milk twice, and producers lose consumers because of the lack of quality product. Results from an investigation and prosecution by California attorney general are outlined in chart 2, attached.
    Federal order reform, which now more closely resembles the California system, impacted all of the counties of the United States except Clark County, Nevada. One handler in the United States is exempted from the stabilization effect of marketing orders, and the result is instability.
    Although this handler's purchase price for milk he buys from the producer is lower, data indicates that retail prices are higher and than in surrounding States. Furthermore, compensatory payments are being extracted from non-Clark County processors. This exemption must end for Clark County so that market stability can be assured in the region.
    The year 2000 brought record low prices for cheese milk in the United States. Dairymen saw this coming, but had confidence that the Price Support Program might help them to hold on long enough for price recovery to occur. The purchase price under the program is below the cost of production, so it does not stimulate additional supply, but is at a level that would allow most producers to weather the pricing trough.
 Page 32       PREV PAGE       TOP OF DOC
    However, producers learned that the safety net deployed by Congress to protect them is full of holes. Processors were not required to pay them the support price, as many believed, but could voluntary opt in. Most processors opted out and hundreds of American dairy farmers were sent into a free fall and out of the dairy business.
    Western United supports the extension of the Price Support Program that is at a level that does not stimulate, quote, additional production. However, we would respectfully request that this Congress close the gaping holes in the producer safety net.
    This concludes my oral testimony. Written testimony is being provided to the record. Thank you for the opportunity to provide input into the process, and I will be happy to answer any questions, thank you.
    [The prepared statement of Mr. Carinalli appears at the conclusion of the hearing.]
    Mr. POMBO. I would like to welcome Mr. Douma here this morning, who has a place down the road from mine.


    Mr. DOUMA. Thank you, Mr. Chairman, members of the committee. My name is Fred A. Douma and I am dairy producer operating in San Joaquin County, CA. I am testifying today on behalf of Milk Producers Council, which is a dairy producer trade association operating primarily in southern and central California. For the past two decades, MPC has been consistent in evaluating and promoting Federal dairy policies that conform to the following four basic principles:
    Dairy producer income should come from the market;
 Page 33       PREV PAGE       TOP OF DOC
    Price should be the major factor in adjusting supply and demand;
    Government should provide a safety net that supports the market price of dairy products, but does not encourage surplus protection; and
    Government should continue to enforce marketing orders that fairly allocate market dollars between producers and processors.
    Prior to the 1981 farm bill, the 1977 farm bill utilized a policy of using the support programs to actually enhance producer prices, as opposed to simply using the support program as a market clearing safety net. The consequence of that policy was unprecedented milk surpluses. It took nearly a decade of difficult economic adjustments and a huge Government cow buyout program before the milk supply and demand situation returned to more manageable levels.
    While the 1995 farm bill intended to end the dairy support program in 1999, it has been extended because both the industry and the Congress realized that at the current price level of $9.90, the program was acting as the market clearing safety net that it was originally designed to be. Milk Producers Council strongly supports the continuance of the support price program at that current $9.90 level.
    However, there are two problems with the current operation of the support price program, which we would like to bring to attention of the committee.
    During the year 2000, market prices for cheese, in particular, fell to a point where it was very important for the support program to kick in and provide a safety net. Unfortunately, while USDA did publish and was apparently willing to buy cheese at a price that would enable cheesemakers to pay at least the $9.90 support price to producers, in reality, the market price fell far below USDA's published cheese price. As a result, the Federal Order price for milk used to make cheese fell to a totally unacceptable $8.57 per hundredweight in November 2000. In our view, had the support program worked as it should have, the producer price for milk used to make cheese would have stabilized at around the support price level of $9.90 per hundredweight. Milk Producers Council would propose two remedies to this problem.
 Page 34       PREV PAGE       TOP OF DOC
    First, USDA should streamline and modernize its purchase rules so that the Commodity Credit Corporation is able to clear the cheese market when a market collapse is imminent.
    Second, USDA should use the support purchase prices for butter, powder and cheese as the minimum market prices in the Federal Milk Marketing Order pricing formulas. Under the current FMMO formula, dairy manufacturing plants report on a weekly basis to USDA the prices they are receiving for butter, powder and cheese. USDA then sets the producer prices based on these market price reports. The formulas give manufacturers a fixed make allowance which remains constant regardless of the market price of the dairy commodity. In effect, what this system does is allow manufacturers to almost fully transfer the market price risk to producers.
    On the level of purchase prices, while Congress specifically set the support price at $9.90 per hundredweight, the decision about what the purchase prices of butter, powder and cheese are, to accomplish that outcome, is left to USDA. Over the past 18 months, the Commodity Credit Corporation has purchased over 600 million pounds of nonfat dry milk through the support program. When CCC begins to purchase nearly one-half of all the nonfat dry milk produced in the United States, then the program is in danger of triggering the kind of surpluses, at least of a particular product, which could hang over the industry for a long time and undermine the market's ability to recover. It is our view that a modest adjustment in the butter-powder purchase prices now will allow the nonfat dry milk to become more competitive in the marketplace.
    Three times in the last 2 years Congress has authorized direct payments to producers. However, Milk Producers Council does not believe that any type of direct payment should be part of our national dairy policy. Therefore, we are opposed to the cash deficiency payment program that is being proposed by National Milk Producers Federation. In that proposal, a target price of $11.08 per hundredweight is established and for every month that the market price does not reach that level, cash payments from the U.S. taxpayer would flow to dairy producers.
 Page 35       PREV PAGE       TOP OF DOC
    This proposal has several flaws that made it bad dairy policy:
    Because this program would limit the impact of low milk market prices on producers, the market signals normally sent when milk is in a surplus condition would be muted. This fact would move U.S. dairy policy further away from market orientation.
    With direct cash Government payments taking of low milk prices off of producers, the incentive for cheese plants to raise the market price of cheese would be minimized, further distorting market signals.
    Under current U.S. feed grain policy, low feed costs to dairy farmers make a $11.08 target price profitable for many producers. Having the Government guarantee that price would likely stimulate increases in production, which would lead to significant milk surpluses.
    Government costs of the dairy program would dramatically increase, which could undermine political support for the legitimate functions of the U.S. dairy program.
    To start out with a program, whose proponents' own analyses show will cause dairy producers to become permanently addicted to Government cash to survive, is policy that should be soundly rejected by Congress.
    The market works and the dairy industry has the opportunity to again prosper because of the fundamental soundness of the policies that have been in place for the past two decades. Now is no time to make a radical change in those policies.
    We support the milk protein concentrate bill legislation which is going on, and Milk Producers Council supports continuation of the Dairy Export Incentive Program until such time as all subsidized exports are forbidden by dairy trade agreements.
    We thank you for the opportunity to testify today.
    [The prepared statement of Mr. Douma appears at the conclusion of the hearing.]
    Mr. POMBO. Ms. Tipton
 Page 36       PREV PAGE       TOP OF DOC


    Ms. TIPTON. Mr. Chairman and members of the subcommittee, thank you for the opportunity to share the views of our member companies across the United States. I would like to just summarize some of the objectives we think are important for measuring policy options as you go through this process, and I will comment on why we think each of them is important and mention some specific policy ideas we have related to each of these objectives.
    First, we think a new dairy policy should be, first of all, fundamentally national in scope and should minimize artificial enhancement of milk and dairy product prices, especially those that benefit some regions to the detriment of others. We currently, as you all know, have three Federal programs. We have a Dairy Crisis Support Program, we have a Federal Milk Marketing Program, and we have a Dairy Export Incentive Program. We also have a Northeast Interstate Dairy Compact in the New England States. We believe you have the opportunity to review and rethink how to best provide a safety net for our Nation's dairy producers in a way that is not going to pick winners and losers or continue to drive the regional differences we have today.
    We have all felt the difficulties represented by policies that increase industry divisiveness, and I think the dairy industry and all of us would be far better served by policy that attempts to minimize these differences.
    Our second objective would be to provide a safety net for dairy producers that, to the maximum extent possible, does not artificially interfere with market prices. The Dairy Price Support Program, as it is being operated today, keeps the price for nonfat dry milk artificially high, and this has returned us to large Government purchases in the dairy sector and has led to increased imports of milk protein concentrates, because it is now economically more attractive for U.S. processors to turn milk into nonfat dry milk for sale to the Government than it is to manufacture MPCs to meet a wide variety of product uses here in the United States.
 Page 37       PREV PAGE       TOP OF DOC
    Instead of increasing import tariffs, as has been proposed in recent legislation that was introduced, we believe a far better and more immediate way to decrease demand for these imports would be to adjust the tilt in the purchase prices for butter and nonfat dry milk. This would make our domestically produced milk protein products competitive with imports and even provide new economic incentives for domestic milk producers to manufacture MPC within the United States.
    To address both of these first two objectives in the longer term, we propose replacing the Dairy Price Support Program with a new safety net program. We offer as a suggestion a Dairy Margin Assurance Program that would be national, but address the differences in costs in markets regionally by providing direct payments to dairy producers that would help them manage their two greatest sources of income variability, and those are their milk price and their feed cost. We have attached an explanation of how this might work to our testimony that was submitted.
    Our third objective or measure for policy is that we believe it should promote the development and use of risk management tools by all segments of the dairy industry. There is currently a pilot program in place that allows everyone in the dairy business except fluid milk class I processors to enter into contracts between the milk buyers and sellers, and our members who are offering forward contracts have reported to us that use by producers of this tool under the pilot program to manage risk is actually increasing.
    We believe this is because contracts help producers smooth out seasonal fluctuations in milk prices. This enables the producer to forward contract for feed, then go to his or her banker with these contracts as evidence of income and margin stability. That improves their ability to get loans for capital improvements, for many needs on their dairy operations.
    So, in summary on that, we support authority for permanent forward contracting for all buyers and sellers of milk; and lastly, we believe it is very important that new policies be consistent with our country's obligations and objectives with respect to international trade agreements.
 Page 38       PREV PAGE       TOP OF DOC
    To recap our specific policy recommendations, they are: to replace the Price Support Program with a new safety program that is national, not regional, and does not unnecessarily drive up the cost of products; and to provide permanent authority for forward contracting among all dairy buyers and sellers. In addition to these, we support programs that would help producers meet environmental goals—this is very important to us—to assure the development of adequate milk supplies and to assure the competitiveness of our U.S. dairy industry globally.
    In closing, we appreciate that everyone here wants to see a prosperous dairy industry. We obviously do, as well. We have a dairy industry that is changing to meet market demands and to stay on the table in America's households. At the same time, we have a dairy industry that must work to tap new customers in other parts of the world as we realize that 96 percent of the consumers in this world are outside of our borders. Meeting these challenges, we think, will take a better partnership between producers and processors and will require policies that unshackle the industry so that it can grow and compete.
    And one last thing, Mr. Chairman, if I might, others have addressed dairy compacts. In our submitted statement, we just basically touched on that because we know that the jurisdiction for that rests in another committee. We do believe it is very important, however, to the dairy industry, and because of that and because it has been raised by others, I would like to ask if we might submit for the record an additional short statement on dairy compacts, and we have brought copies of that for the subcommittee.
    [The prepared statement of Ms. Tipton appears at the conclusion of the hearing.]
    Mr. POMBO. Withut objection.
    Ms. Tipton, I want to go to one part of your written testimony, where you talk about the MPCs and how current dairy policy has resulted in a situation where, for some reason, it makes economic sense to import that into our market. When we are dealing with a situation where most of our international competition has different ways of subsidizing their dairy industry, how do we compete with that?
 Page 39       PREV PAGE       TOP OF DOC
    Ms. TIPTON. Well, I would agree with you, Mr. Chairman, that one of the big problems our dairy industry faces is export subsidies from other countries. But with respect to the milk protein concentrates that have come in in an increasing amount in the last year, we do think that is primarily because we have kept our nonfat milk prices through the Price Support Program—that it has been more attractive for producers of nonfat milk to sell that to the Government than to develop the products that the market is asking for. And frankly, if we adjusted the tilt in the purchase prices by 10 cents, we believe that we would bring the dairy proteins on par with—the dairy proteins produced in the United States on par with those that are coming in with world market prices.
    And so we think that an immediate step could be taken by the Department of Agriculture to adjust that purchase price for nonfat dry milk by 10 cents and alleviate a lot of these imports that are coming in.
    We think that should be a first step before we jump to putting new tariffs on anything.
    Mr. POMBO. Mr. Douma, in your testimony, along with others, you talk about the price of, for example, the nonfat dry milk and the ability of a producer to come out with what the current price is. Can you comment on lowering that price so that it is competitive with the imports?
    Mr. DOUMA. Yes. We feel that, truly, nonfat dry milk is probably supported at too high a price at this moment. The world market price is probably closer to 10 cents below our current level. That will obviously take the cost for price down a little bit and that will take the class I prices in almost all regions of the Nation down a little bit, but if you look at the alternative, if you look at the supply of nonfat dry milk that is currently in storage and the amounts that are currently being made every month, and currently USDA is in the process of offering to sell back 3-year-old nonfat dry milk for calf feed, which we haven't done since, I believe, 1989 or something like that, or 1988.
 Page 40       PREV PAGE       TOP OF DOC
    It is scary, and we think it is better to swallow at this time and take that adjustment in the nonfat dry milk price and get it where it probably then will have another market. But we would go further. We also think that milk protein concentrates should be tariffed. They fell through the cracks during the Rounds.
    It is a fairness issue. We never had milk protein concentrates come in and it was never thought of at that time. It is now, and we truly should develop a tariff for milk protein concentrate, and that actually would put everything back in a competitive ball game.
    Mr. POMBO. Mr. Carinalli, I know in your written testimony you addressed this issue as well, and I would like you to comment on that further.
    Mr. CARINALLI. On the tilt?
    Mr. POMBO. Yes.
    Mr. CARINALLI. Well, at Western United we feel pretty strongly, if we enhance the standards or at least enforce the current standards there, we probably wouldn't have the product to start with. If we sell to consumers what comes from the cow, you don't have much left over.
    So I think that, in a lot of cases, the product that has been sold has been watered down and been termed down from what it should be, that you have all this stuff and to reduce the price of nonfat powder today would cost the American dairymen millions of dollars. It is a staggering amount, and you know, then you just get into probably more direct payments, if that is the way you want to keep the industry going or not, and we don't really believe in that form.
    Mr. POMBO. Ms. Tipton, I want to give you an opportunity to respond to the topic that Mr. Carinalli brought up in terms of the enforcing the standards; and I don't know if you have had the opportunity to see his testimony, but he did include a chart that shows the butterfat and solids, not fat, standards and I would like to have you comment on that, if you would.
 Page 41       PREV PAGE       TOP OF DOC
    Ms. TIPTON. Mr. Chairman, I am happy to.
    I am just seeing this now, but first of all, Mr. Carinalli characterized that milk was not being sold as it came from the cow, and of course, that is illegal. The pasteurized milk ordinance doesn't allow anybody to add water to standardize milk solids downward, so I don't know why these are failing; but if they are adding water to their milk, that is certainly illegal.
    With regard to changing the Federal standards, we have always taken the position that processors should be able to sell a variety of milks that meet consumer demands. And we clearly think that higher quality milks are a good idea, and there are now a variety of all kinds of new products in the marketplace to try and compete with the other beverages that are out there.
    So I don't think the answer is a Government-mandated change in the standard. I certainly think that we need to make sure people aren't employing illegal practices of watering down their milk, but as far as I know, that is not a major issue.
    One other thing Mr. Carinalli referenced they would just like to respond to, as well, and he talked about the adjustment in the price support tilt being a difficulty for producers on their price; and I would admit that in the short term, it would have some impact on the price, but that would be more than offset by what is going on in the current marketplace.
    USDA estimates that dairy producers this year over last year will have an additional $2.8 billion coming out of the market because of increased prices, the strength of the prices; and in addition to that, of course, as you know, the Congress has given direct payments that will be given to dairy producers this year, upwards of $600 million.
    So I admit that there will be some short-term hit to the producer price, but it will be far less than that and far offset by that; and we believe that the long-term effects of getting the market straightened out would certainly be more to the benefit of the producer and would help stabilize the market.
 Page 42       PREV PAGE       TOP OF DOC
    Mr. POMBO. Mr. Peterson.
    Mr. PETERSON. Thank you, Mr. Chairman.
    There is so much focus on this MPC issue, and if I could figure out a way to eliminate it, I would. I think we need to keep our eye on the ball here.
    First of all, this is another issue where this committee doesn't have jurisdiction, and if we try to do something, it would get referred to the Ways and Means Committee. And I don't know if any of you have talked to anybody on the Ways and Means Committee or the Finance Committee in the Senate, but there is about as much chance of this bill passing those committees as there is that the Europeans are going to give up their common agricultural policy, from what I can tell. So I don't see how legislatively we are going to get this done.
    Nobody has been able to explain to me how we are going to be successful if we bring some kind of an action there upon the WTO. And I would be happy if somebody could give me a strategy that they think might be successful.
    But given all that, say that we somehow or another accomplish this, that we put up rider in a conference committee, or whatever, and we ban MPC; and in that sort of a market, enough that we got prices to go back up to $15, $16, and we ended up in the same situation where we added cows and added production and then we clamped back down to $10, what have we accomplished?
    One of my concerns is that we have got parts of the country where it seems like whenever the price goes up, we see increase in the industry by either adding cows or adding production that is in excess of what the market is. And I get this thing from Dairy Profit Weekly every week that shows the production the last month, and in certain places—especially Idaho and New Mexico—they are going up 10, 15 percent every month. California, when we have high prices, is going up 10 percent. My area of Wisconsin, every reporting is down 3, 4, 5 percent.
    So my question to my friends in California—and I guess there is nobody here from Idaho or New Mexico, but do you have, is your market going up in California 4 and 5 percent a month, or a year, or are you producing more than your market is absorbing? It seems to me, looking at what is going on around the country, that the West is producing more milk than they are consuming on a consistent basis; and in other parts of the country, in the East and Midwest, we are going down even though our market is actually going up.
 Page 43       PREV PAGE       TOP OF DOC
    Our cheese market is the one area where we have had growth in this country, and yet the area—that is, our area that produces mostly for cheese, the production is going down. And I know California produces a lot of cheese, too, but in California what is the reason you are producing more during the times of high prices than you actually can put into the marketplace?
    I don't know which one of you wants to answer.
    Mr. DOUMA. I will grab that.
    I guess the question back—and I am not trying to be funny—but what is California's marketplace?
    Mr. PETERSON. Well——
    Mr. DOUMA. The reason I say that, the plants, to a dairy farmer, which I am—my market is the plant that is willing to take my milk. Plants are being built in California. They are still being built. They are under construction. They are planned. So our market for milk is expanding in the West, as it is in Idaho or Utah. I am not sure about New Mexico as far as plant capacity, but California has taken and has become a large cheese-producer State. We market cheese nationally.
    Mr. PETERSON. But isn't there a lot of powder going in?
    Mr. DOUMA. There is a lot of powder.
    Mr. DOUMA. To the CCC in California.
    Mr. PETERSON. So doesn't that mean there is a surplus out there, or does that just mean they can get a better price?
    Mr. DOUMA. It means the CCC is willing to pay a better price for powder.
    Mr. PETERSON. So you wouldn't characterize that as overproducing?
 Page 44       PREV PAGE       TOP OF DOC
    Mr. DOUMA. We would characterize that as probably a current problem of the purchase price program.
    Mr. CARINALLI. I think on that part, butter is a big seller today, and when you have butter, you have got powdered milk. You have got to do something with it, so I would answer, they go into powder. The butter is in short supply.
    Not only that, but we are not only in a regional market but we are in the national and the world markets. So I think when you start pitting one area of the country against another, it is not good policy. I think—and the other part of that is that the major processors in California are national co-ops. We have got LOL and DFA, and they buy as much milk all over the country as they do in California.
    Mr. PETERSON. Well, I am aware of that. We would just like, in Minnesota, to have a quota system like you have in California that would help us survive some of this.
    So thank you, Mr. Chairman.
    Mr. POMBO. Mr. Gutknecht.
    Mr. GUTKNECHT. Thank you, Mr. Chairman.
    First of all, I want to strongly agree with something Mr. Carinalli just said. That is, pitting one region against the other is really a mistake, and that is one of the concerns we have in the upper Midwest about the whole Milk Marketing Order System, that in fact it does pit regions against each other.
    The second point that I am concerned about is, these dairy compacts—and you can couch them in any terms you want, but in many respects it again just pits regions against each other, and—but I am concerned. I do understand why we don't have jurisdiction over the issue, one end of the issue, but I don't understand why we don't have jurisdiction over MPCs. I mean, that clearly is a dairy issue.
 Page 45       PREV PAGE       TOP OF DOC
    Mr. POMBO. Well, I think we have jurisdiction over the dairy industry, so generally we do have jurisdiction, but when you get into a specific trade issue, which is the tariff issue, it gets referred to Ways and Means.
    Mr. GUTKNECHT. OK. But the compacts are clearly a commerce issue, judiciary, the commerce clause of the Congress.
    I want to come back to Ms. Tipton and get back to this whole thing of milk protein concentrate, because we—I must tell you that until 6 months ago I had never heard of milk protein concentrate and, frankly, in visiting with some of the senior members of this committee, when I used the term MPC, they gave me a blank look.
    Now, up until about 3 months ago, most of the processors were saying they didn't use it, but now we know it has become a bigger and bigger part of the entire dairy industry; and what we are trying to get our arms around is, what does this all mean, what does it get used for and why is it now we have an estimate coming from our own USDA that if we don't do something in terms of changing policies or closing ''this loophole,'' as some would say, that this is going to cost our dairy producers over $90 million over the next several years.
    Can you give us a little more information about, how do you use it and why it is important to you?
    Ms. TIPTON. I will try going back to something Mr. Douma said a moment ago, and that is, they are building more capacity for cheese production and whatnot in California. And Mr. Peterson acknowledged that you are losing producers in your part of the world.
    We have members, of course, across the United States; but cheese companies who are in Minnesota and Wisconsin have been particularly hurt, as you know, by the combination of how the Federal Order Program works and how the price support program has been administered. And these are companies that have to sell their cheese and compete with the California cheese producers. I mean, cheese is—it has a national market, so they have got to compete on that finished product. They find themselves, in Wisconsin and Minnesota, having to pay very big premiums to try and keep their producers in business, however, under this current marketing system. So they are paying a lot more money to get their milk in Minnesota and Wisconsin. In essence, even though the Federal price is down, they have to pay more to get it because, otherwise, these guys go out of business. So they pay more for their milk than a California cheese company is paying for their milk.
 Page 46       PREV PAGE       TOP OF DOC
    How do they produce a product that is competitive? In the end, one of the ways they have been doing it—for instance, in our membership, Nabisco Foods up near your area, Mr. Gutknecht, has a plant out in Idaho where they actually are filtering milk, which is a very similar product to the MPCs that are coming in, only it is a wet product versus a dry product; but it is a concentration of the proteins of milk. And they are bringing that from Idaho to Minnesota to use in some of their nonstandardized products in order to compete in the marketplace with a national market for cheese.
    So these are the kinds of things that are going on. You have actually got companies that need to have competitive dairy ingredients that are in your area, and if they don't have them, they are going to have to move their facilities. So this is part of the issue here.
    We have got to be able to have dairy ingredients available to companies across the country, to allow them to stay competitive; and they need to stay competitive with other countries products as well. To close our borders to something and to make our own industry noncompetitive in producing product is certainly not the answer from our point of view.
    Mr. GUTKNECHT. I give you an ''A'' for effort on the answer, Ms. Tipton, but I want to come back to the question because it presupposes we don't have enough milk to make cheese in the United States, and that is simply not the case. We have more than enough milk to make cheese in the United States, and we can be competitive. I don't understand why it is.
    I do understand why Nabisco would bring in milk from Idaho, because frankly we have more cheese-making capacity right now than we have cows that produce the milk. I understand that. I understand being and allowing them to make this product in Idaho, take out as much of the water, ship less water; that makes sense.
    But why is it, all of a sudden, we want to import what looks like $700 million worth of additional milk product into the country for the last several years?
 Page 47       PREV PAGE       TOP OF DOC
    Ms. TIPTON. Well, last year our Government spent $500 million buying domestically produced nonfat dry milk.
    So, no, we don't have a surplus here. That is not the reason they are buying nonfat dry milk. It is because the price is sufficiently high, set by the Government, that it is more attractive to sell to the Government than to make it into products that the industry can use. So they are selling to the Government, and at the same time, the companies are buying imported products.
    We could just make that a wash if we could adjust that price and develop that industry here.
    Mr. GUTKNECHT. That was a very good answer. Thank you.
    Mr. POMBO. Mr. Holden.
    Mr. HOLDEN. Thank you, Mr. Chairman. I realize that the Judiciary Committee has primary jurisdiction over dairy compacts, but I think we would be neglecting our oversight responsibilities if we didn't talk about their successes and failures. So I have a few questions in that area.
    Mr. Lincoln, as you are probably aware, this committee has shown a great deal of interest in devising countercyclical payment to other commodities as a safety net to farmers when crop payments are low. I suspect that is the same concept as dairy compacts but without the payments from the Federal Government.
    Mr. LINCOLN. Exactly. That is why we in New York are very supportive of extending and expanding the Northeast Compact and supporting the Southeast Dairy Compact.
    I think the other factor you need to look at is the fact that there are 25 States that have passed legislation to allow the compact. There are another three or four States that are looking at and seriously considering that.
 Page 48       PREV PAGE       TOP OF DOC
    So if you talk about grass-root efforts from the industry, and market oriented—I have been a dairy producer since graduating from Cornell in the early 1960's. I think we all have to recognize it is a very fast-changing industry. The markets are changing. The marketplace is changing. It is a global—beginning to be a global economy.
    But different members of the panel have talked about the fact of keeping the producers competitive, keeping producers in certain sections of the country viable. The Dairy Compact is a thing that can do that. It is a countercyclical program that is very market oriented. It has a commission that is made up of producers, processors, consumers. The producers are not majority on that commission.
    So I think it is as market oriented as any program that could be designed. The payments do not come from the Government. They ultimately will be from a consumer. But if you look at the comparative prices to the consumer, there are many other factors that go into what reaches, still, that retail price, so comparatively the Northeast prices have not been relatively higher than many other parts of the country. The impact on the consumer hasn't been significant.
    So I think it does answer a good many questions as far as not being in—taking Government money. It is producer-supported, it is marketed-oriented and countercyclical.
    Mr. HOLDEN. Have you heard from our friends from the upper Midwest? They have legitimate, sincere concerns about the reauthorization and the expansion of dairy compacts. How can we assure them that it will not lead to overproduction and drive down the price of cheese?
    Mr. LINCOLN. Well, there is still—in the current Northeast there is somewhat, I guess, what I would refer to as voluntary supply management. I know if a producer's production, I believe, if it still goes above what the national average is, then they are deducted a certain amount from what they are paid. So there is incentive for those producers to stay within the natural growth of the national production through this voluntary supply management concept that is part of the Dairy Compact.
 Page 49       PREV PAGE       TOP OF DOC
    Mr. HOLDEN. And finally—you briefly touched on it with the price—the cost to consumers in Dairy Compact areas, and I wonder—maybe I should address Ms. Tipton first, because I had an opportunity briefly to look at your statement as to price to consumers, and it seems to contradict the few reports or studies that I have read previously, that I don't have in front of me now.
    The ones that I remember state that there was no real increased cost to the consumer; in fact, that it was cheaper to buy milk in Boston than in New York City.
    So maybe, Ms. Tipton, if you can go first and elaborate on what you have put down in your comments here.
    And then I will follow up with you, Mr. Lincoln, because you briefly touched on it.
    Ms. TIPTON. Thank you, Mr. Holden.
    Well, first of all, the price in New York City is probably going to be higher than in Boston pretty much, no matter what you do in Boston. So it is sort of an irrelevant comparison.
    I grant you that is the comparison that is thrown out there, but the more relevant comparison is, what would the price have been in Boston with a compact versus without a compact? And the studies try to obfuscate that all sorts of ways, but even the recently released University of Connecticut study, which I think uses some very questionable methodologies to come to conclusions that the researchers seem to have in advance, they at least admit that there is a cost—a higher cost to consumers. The way they arrive at theirs, however, is to look at a period before the compact went into effect and then after the compact went into effect, which I would submit is totally irrelevant as well.
    We have a Federal milk pricing system where you can look very easily at every month what the price would have been without a compact under the Federal Order system and what it is with the compact. And if you do that comparison in the New England area for the months that the University of Connecticut study was in effect, you find there was a 16 cent increase just between the Federal Order price and the compact price, 16 cents a gallon.
 Page 50       PREV PAGE       TOP OF DOC
    So people throw out a lot of numbers, Mr. Holden, on this, but I think if you really analyze it and look at the facts you will see there is an increased cost to the consumer. Because, after all, where is that increased money to the farmers going to come from? The farmers in New England have gotten $130 million, $140 million more as a result of the compact since it went into effect, and you know that a large amount of that had to come out of the prices paid for the milk in that region.
    So the main reason that we don't care for that, quite frankly, is because our members are in the business of selling milk, and we think the more milk we can sell the better off we are, and we are in an increasingly competitive beverage market. In fact, I brought something that, since you are from Pennsylvania, you will appreciate.
    This is put out by a Pennsylvania dairy company, Gallagher Dairy, and this is a new product line they have. They have made—they are trying to make an attempt to compete with bottled waters, with iced teas, with soft drinks. You have seen all of the products that are out there in the marketplace.
    It would take 11 of these very stylish new bottles to equal 1 gallon of white milk. These are all different flavors. There is orange cream. There is banana. There is strawberry. There is chocolate. They have entered into an agreement with a popular cartoon character.
    All of these things cost a lot more money to market, but I would submit that they are going to sell a heck of a lot more of these. In fact, they have got vending machines in schools; and the number of units that move out of those vending machines in a week is like four or five times higher than the soft drinks that move out of the vending machines.
    So we have got people who want to get out there and want to sell more milk. I think that is going to be to the benefit not only of the processor but the producer, but we have got to have a competitive milk supply. We can't put up barriers to moving a product from one State to another or one region to another.
 Page 51       PREV PAGE       TOP OF DOC
    Mr. HOLDEN. Did you say Gallagher Dairy?
    Ms. TIPTON. Gallagher.
    Mr. HOLDEN. In Johnstown?
    Ms. TIPTON. Yes.
    Mr. HOLDEN. Mr. Lincoln, do you want to follow up on the difference between the price in and outside the compact area?
    Mr. LINCOLN. Yes. And, again, I agree. I think prices vary, but some of the analysis that we had done, which is May 1999 through April 2000, suggests that in the upper Midwest there was about $2.70 a gallon, compared to $2.76 in the Northeast, $2.80 in the South and $2.85 in the West. I did have $135 million to 4,000 farmers.
    I think the fact is, though—and I have been a member and involved in the upstate milk co-op and understand the milk pricing to a large degree—farmer pay prices is only a portion of the consumer price. The labor costs, fuel costs, all the plant costs, all go into what the processor or the cooperative has. And then you get into the retail competition, depends on how many others are in the marketplace. So it is very hard to really compare fluid milk prices, but I think if you look at the bottom line, the farmer price, the compact price has not had an impact on what the consumer pays.
    Mr. HOLDEN. Thank you, Mr. Chairman.
    Mr. POMBO. Mr. Goodlatte.
    Mr. GOODLATTE. Thank you, Mr. Chairman.
    Mr. Lincoln, I have looked at evidence that suggests to me that the Northeast Dairy Compact hasn't done what it was advertised to the Congress as doing when it was first promoted, which was to save northeastern dairy farms.
    In 1991, there were nearly 2,100 of those farms; and that had declined by July 1997 when the compact went into effect to about 1,850—well, actually, more like 1,900. But in the ensuing 4 years or nearly 4 years since the compact went into effect, they have declined from 1,900 down to less than 1,550; and the rate of decline has not altered at all. The number of farms in the Northeast is continuing to drop.
 Page 52       PREV PAGE       TOP OF DOC
    In addition, the problem, in my opinion, and my dairy farmers in Virginia would love to be part of a compact as well, but the problem is the precedent that has been established here. Around 1800, we had a very famous Supreme Court decision in this case called Ogden v. New York in which the State of New York attempted to charge a tariff for goods going across the Hudson River from New Jersey; and the Supreme Court ruled that that was the province of the Federal Government to regulate interstate commerce.
    Since that time and until July, 1997, I am not aware of any instance when this Congress has given to any group of States the ability to regulate interstate commerce, which is exactly what the Northeast Dairy Compact does; and I wonder why it is that the American Farm Bureau would take the position of wanting to restrict the flow of goods and control the price of the flow of goods across State lines when they are pushing so hard—and I so strongly support their effort—to open up international markets for the sale of goods.
    So the concern to me is that now that this precedent has been established and we want 25 more States or whatever to come in and become participants in various compacts, that how do we draw the line at just milk? I mean, why wouldn't we have a wheat compact? I understand there are midwestern grain growers that would like to have a regional compact, and I would think that steel manufacturers might like to have a compact or shoe manufacturers or providers of a wide variety of different types of goods.
    What I see the Northeast Dairy Compact as doing and why I strongly support my dairy farmers' efforts to get help in other ways but not with a compact is because I see it vulcanizing the greatest open market in the world and pitting one part of the country against another; and why the American Farm Bureau would take that position I don't know. Would you care to respond?
    Mr. LINCOLN. Sir, I would be happy to.
    First off, to address the American Farm Bureau's position, the American Farm Bureau's policy is established through delegate action, through action taken at the county Farm Bureau level through the State Farm Bureau and the national meeting which was held in January and by delegate action majority of delegates.
 Page 53       PREV PAGE       TOP OF DOC
    Mr. GOODLATTE. My question, Mr. Lincoln, is why.
    Mr. LINCOLN. As to why the Americans supported it, I am telling you why the Americans supported it is because we are a grassroots organization. The majority of the producers are present at that delegate meeting and many—as I indicated, over 25 States have already, including Virginia, have passed legislation allowing them to be part of an interstate compact. And that is exactly the second part of your question, it has been through the courts. It was found by the courts to be and upheld, but that is why we have——
    Mr. GOODLATTE. Reclaiming my time, Mr. Lincoln. I hate to interrupt, but the reason why the courts upheld it is because the Congress authorized it to take place under very questionable circumstances, which is a provision was slipped into a very large bill in the closing hours of a session of Congress several years ago—and I don't approve of that method—but the Congress clearly, by putting that in that legislation, authorized it to take place.
    What I am asking you is, to defend the merits of them when they don't even work, when the number of dairy farms in New England and upstate New York continues to decline at rapid rate, why should we justify it?
    The other figure that really concerns me is this: You cite with some significance the fact that $135 million more has gone to dairy farms over that period of time. There are 4,000 farms. That, I assume, includes upstate New York as well. Four thousand farmers dividing $135 million over 4 years works out to about $8,000 a farm. Why is it worth—a dramatic change in the fact that the Federal Government has traditionally regulated interstate commerce in this country. Why is it worth abandoning that to groups of States for such a small benefit that clearly isn't working because the farms are continuing to go out of business anyway?
    Mr. LINCOLN. Well, I think, first off, the compact was never designed to keep every farmer, every dairy farmer in existence; and I think if we were trying to design Federal policy to do that, I guess you are certainly going against any market-oriented commodity programs. So the purpose of it was not to keep everyone in business but was to slow that decline.
 Page 54       PREV PAGE       TOP OF DOC
    I think, if you look at the facts, it has slowed the decline of——
    Mr. GOODLATTE. I have got—Mr. Lincoln, I have the chart right here of the rate of decline of farms in the Northeast; and, if anything, it has accelerated over the time—this is the time frame after the compact went into effect. This is the time frame before. There is a steady decline. If anything, it curves even a little more sharply downward after the implementation of the compact.
    Mr. LINCOLN. But I think, in fairness, you have to look at—and it gets into hypothetical situations, but you would have declined or most people in the Northeast believe it would have declined at a faster rate than it has. Because what it has done—and you mentioned New York. New York is currently not part of the compact. We do have 1,500 producers in New York, because milk goes into the New England States that are benefiting from a compact and have benefitted to the tune of 50 to 60 cents a hundredweight, and some of them are my neighbors.
    What it has—basically, the figures that I have seen, it has made a difference of about $16,000 to a 50-cow dairy farm; and $16,000 in low milk prices in many years made the difference between that family having a living income and not having a living income.
    Mr. GOODLATTE. I think your own figures refute that. Your figures in your testimony would indicate that the average farm is getting about $8,000 a year from that. I think the average farm is probably larger than 50 cows, but, given that fact, it seems to me that this is an awful lot of effort and changing a very, very important precedent that has been established in this country for 200 years simply for a supposed benefit that isn't even working.
    Mr. Chairman, I thank you.
    Mr. POMBO. Mr. Dooley.
    Mr. DOOLEY. Thank you, Mr. Chairman.
 Page 55       PREV PAGE       TOP OF DOC
    I just want to bring folks' attention the fact that we do have three Californians testifying today and, unlike in past years, there is a lot of agreement among all three of you, which some of us find to be a pleasant development. And that agreement is really on the extension of the price support program at $9.90.
    But there is an area of disagreement that, Mr. Douma, you talked about a little bit in terms of the adjustment of the powder price tilt; and you allude to the fact that, over the past year, we had at one point in time, or at least for a period of time, the Federal Government purchasing almost half the powder that was being produced. And you contend that is not sustainable. Thus, you are advocating that there be an adjustment in the tilt.
    Now some of the people who oppose that are contending that would have an impact on the dairy producer income. I think Mr. Lincoln contends it would be $850 million in 1 year. Do you come to a different conclusion on the profit impact or is your assessment over the longer term that there will be recouping of some of that?
    Mr. DOUMA. Our assessment is over the longer term.
    In the short term, there probably would be an impact because the class IV price would go down a level, which would impact the class I and class II prices. However, where are our prices going to go when the Government is no longer willing to buy all this powder, when $9.90 is no longer defendable because we are sitting on a mountain of powder and we have to go to something below $9.90? We believe $9.90 is a good price. The problem is in the mix and the butter side.
    Mr. DOOLEY. As I understand, you were contending this is having an adverse impact on the amount that was sold for cheese.
    Mr. DOUMA. On the milk that was sold for cheese, that was another issue. On the new Federal Order reform that went into play, they basically have a milk allowance issue similar to what we have always had in California now put in place in the Federal orders, so it is a fixed margin between the producer price and the price for milk that goes to the processors.
 Page 56       PREV PAGE       TOP OF DOC
    So what happened when the cheese price started to fall below support or below the $9.90 level, the purchase price that CCC was willing to pay, it continued to go into the commercial market at lower prices because no one was ready to package—go into the packaging requirement of CCC. CCC didn't have the inspectors ready to inspect all the cheese, which they should have been doing, or they have to do in order to purchase it. So processors were very, I would say, unconcerned because the margins stayed the same even though the cheese price went below what the CCC price was, the margins. So the only person that lost was the producer on that scenario.
    What we are trying to say is that USDA should change the Federal Order market orders in order to put the bottom end of the pricing at the purchase price level. When they go out and get prices from the industry, it can't go below that purchase price level.
    Mr. DOOLEY. Mr. Carinalli, in terms of Mr. Douma's comments and concerns about the Government ending up purchasing huge quantities of powder, which I think in his testimony is 600 pounds in this last year, is that a concern to you? Or is there some concern among Western United that if the Government is purchasing this, this is also demonstrating that perhaps there is not a consumer market at this point in time for that product out there at the effective $9.90? Why shouldn't we respond to what is a market signal there and adjust that butter/powder price tilt in order that we get the market clearing level, at the same time maintaining the overall $9.90? I mean, how do we see this playing out over time with the Government with Mr. Douma's comment about the Government ending up with a mountain of this stuff?
    Mr. CARINALLI. I understand what he is saying. We put a little different spin to it. If production and consumption gets in line, hopefully that is going to get rectified. I mean, we can go back 8, 10 years ago when we had the mountains of butter that we all thought we would never ever see the end of, the butter piles that we were trying to figure out if we could put it in grease guns or what we could do with it, and all of a sudden butter is gone.
 Page 57       PREV PAGE       TOP OF DOC
    We feel probably the same thing will happen here. The world market hasn't come up on the powder with all the problems overseas in Europe and so on. According to some California processors, they have actually had calls from New Zealand people that can't fill all their powder orders. So I think it is going to probably rectify itself in time.
    The other thing is, the butter market is great; and it is—like I say, it is one of the costs of making butter, is you have powder left over.
    Mr. DOOLEY. My time has expired.
    Mr. POMBO. Mr. Green.
    Mr. GREEN. Thank you, Mr. Chairman.
    Mr. Lincoln, maybe you can clear something up for me. If I understand your testimony, a Dairy Compact really appears to be the magic solution for everything here. You say it helps farmers get more money without forcing consumers to pay more money—I am not sure where the money comes from—and it doesn't hurt other farmers in other regions, and it does help the farmers in the Northeast. Why it is that States like Minnesota and Wisconsin, which have the largest number of dairy farmers in the Nation, why aren't they supporting a compact?
    Mr. LINCOLN. Well, I guess you are asking my opinion. Probably you need to ask them.
    Mr. GREEN. I am asking for the Farm Bureau's answer as to how they explain—you boast about the fact that 25 States have passed resolutions in favor of compacts, but States with the greatest number of dairy farmers have not, and why is it? Are we just missing the boat? We are not very smart in Minnesota and Wisconsin?
    Mr. LINCOLN. Well, first off, I think you need to recognize that the compact only has an impact on the fluid markets, the fluid side of the equation, and there is a difference in the percentage of fluid in the Northeast, the Southeast, in the upper Midwest.
 Page 58       PREV PAGE       TOP OF DOC
    Mr. GREEN. In other words, it wouldn't help the farmers in the upper Midwest?
    Mr. LINCOLN. However, what I hear from a number of producers, a number of producers in the upper Midwest that I had talked to, both at the American meeting and other meetings, they are very interested in a compact. Some of the cooperatives that operate in the Midwest are interested in compacts. So I think it is not fair to say that there is no interest at all.
    Mr. GREEN. They must be the only ones that haven't contacted my office in the last few years. I think it is funny, with all the letters that I have received—thousands of them—and all the dairy farmers I have met and all the dairy farms I have been to, I must have missed the ones that are asking for a compact. I will have to get my staff working on that.
    In all seriousness, you would agree that compacts do pit region against region; and while they may have some marginal benefit for dairy farmers in the Northeast, they don't help dairy farmers in the upper Midwest. Isn't that just the plain truth of it?
    Mr. LINCOLN. Well, I wouldn't agree that they pit region against region and—but I think you know, again, why I say that is because there are other regions, including the Southwest and States like Nebraska and the Midwest, that are seeing some of the benefits—Missouri and other States in the Midwest—of a compact.
    Mr. GREEN. Is it your testimony that the Northeast Dairy Compact has not hurt dairy farmers in Minnesota and Wisconsin?
    Mr. LINCOLN. What my testimony says and what the American Farm Bureau is saying is that we feel it is a program that is a countercyclical program that has had benefits.
    Mr. GREEN. Would you please answer my question? Does the Northeast Dairy Compact hurt dairy farmers in Minnesota and Wisconsin? It is very simple question.
 Page 59       PREV PAGE       TOP OF DOC
    Mr. LINCOLN. I am giving you the answer that is in the testimony, is the fact that it has—it is a benefit to those States that have been participating; and the impact on other States, I guess that is—we haven't evaluated that.
    Mr. GREEN. You haven't evaluated—the American Farm Bureau—and you are the voice of farmers, including the dairy industry, and you have not evaluated whether a compact would hurt States? That is very interesting.
    Mr. LINCOLN. Perhaps States that have been pushing——
    Mr. GREEN. Reclaiming my time, because my time is running short, perhaps you can talk a little bit about that. Does the Northeast Dairy Compact hurt dairy farmers in the upper Midwest? And if it doesn't, why don't dairy farmers in the upper Midwest simply form a compact? We have the largest number of dairy farmers. Why wouldn't we form a compact?
    Ms. TIPTON. Well, the answer is complex, like every answer in dairy. But just on the surface of it, obviously, a compact in any group of States is going to encourage more milk production there. And it has—even though the six New England States that currently is a compact only comprise about 3 percent of the total milk supply, it has encouraged increased production there; and, as has been pointed out, it hasn't saved farmers. They have continued to go out of business. But the ones who are staying in business are putting out more milk; and so, obviously, that has an impact on the market when you get to the manufactured products.
    Milk drinkers are only going to drink so much, and we wish they would drink more, but per capita consumption is not rising. It has been declining for nearly 30 years. And as you produce more milk it is obviously excess of that class I market that you are paying higher prices on, and it goes into other products, and those are sold in a national market, and those do have an effect on other areas that produce those products. And your area is one of those. It is a big cheese-producing region, wouldn't be advantaged by a higher class I price particularly because you don't have that many people up there relative to the milk you produce.
 Page 60       PREV PAGE       TOP OF DOC
    So it is a complex answer, but there certainly are winners and losers as a result of a compact. You are absolutely right on that.
    Mr. GREEN. Thank you, Mr. Chairman.
    Mr. POMBO. Mr. Condit.
    Mr. CONDIT. Thank you, Mr. Chairman.
    First off, let me thank all of you for being here this morning.
    I have a quick question for the two gentlemen from California at this table, Mr. Carinalli and Mr. Douma. Can you maybe give us a brief description of how the high cost of energy is going to affect your business, how it has affected it already, how it is going to affect it this summer? And do you have any suggestions for us for the USDA, something that they could do to be helpful?
    Mr. DOUMA. That energy cost, I can tell you the potential. Because PG&E puts that little number on the bill even though they are in a frozen price and didn't have to pay it. But the December bill there, just my barn meter, which is my largest one, there was a $36,000 credit on CTCs, instead of a charge, because of the frozen price on the bill that was $7,000. So that is a potential increase of energy at the prices that we were paying last year.
    Fortunately, those energy prices are down now. But, as far as the answer, what USDA can do as far as energy, I don't know other than there are methods of methane generation over lagoons which could capture methane for putting into our own generators. That potential is there, but it is probably cost prohibitive. There are investors out there that are willing to invest in equipment. Whether we can get grant moneys—and I know there are some grant moneys through USDA available for that, and they are currently being looked at, but that kind of technology is about the only thing I can see that is currently available.
    Mr. CONDIT. Mr. Carinalli, do you have any experience in this?
 Page 61       PREV PAGE       TOP OF DOC
    Mr. CARINALLI. Well, not too much, other than the California legislature appropriated $11 million for cogeneration for methane and so on. I think that is probably going to be a great help, and we could probably use some help from the Federal Government in the same way to subsidize putting in methane digestors and different ways of generating electricity on the farm to lessen the impact. Because it is—it can be a great impact, and it will be.
    Mr. CONDIT. Do you have any examples of the increased costs to you personally or your neighbors?
    Mr. CARINALLI. I know for the hot water heater for the milk barn my natural gas is the one we have gotten hit real hard with, first was running me about $60 a month and it went to $240 a month. So it is about a 400 percent increase for an example.
    Mr. CONDIT. Thank you very much, and thank you for that deviation from compacts.
    I have one other question that is kind of a deviation from that and that is, can you tell me, the four of you, did your groups support NAFTA and fast track? And, if you did, why? And what do you think of it now, Mr. Lincoln?
    Mr. LINCOLN. Well, yes, we support NAFTA. I think there are some problems with NAFTA, and that has to deal particularly with States like New York. Michigan, for example, where you have specialty crops, the fruit and vegetable people have been adversely, to a large degree, affected by some of the NAFTA agreements. I think also certainly on the dairy bill the Canadian agreements are not at a level playing field.
    I think it is really what all producers are looking for, whether it is the milk protein concentrate or others, is a level playing field fairness; and there is—some of those issues we need to evaluate in NAFTA. But, overall, it is—NAFTA has worked to the benefit of a good many commodities produced in the United States.
 Page 62       PREV PAGE       TOP OF DOC
    Mr. CARINALLI. I think I don't really have a position on NAFTA itself. But we believe in trade and fair trade. That is the whole problem, is particularly the Europeans have been very creative in their subsidies.
    I was in Europe, seeing some of my ancestors back there, and they are getting paid to paint the fences and how many flowers they hang on the outside of their house and so on, and that is not considered a subsidy to the dairy industry and that equals their milk check. So I think that is important, as I stated in my testimony, is that we need fair trade. And it is a tough issue because I know when you are dealing with trade issues you are trading off importing Italian cheese with an air base in Aviano, Italy, or something. So it is a hard problem, and we advocate fair trade.
    Mr. DOUMA. Yes, our group supported NAFTA and fast track; and I believe it has been partially successful. But also NAFTA, if my memory serves me correctly, exempted dairy, so dairy was not part of the NAFTA agreement. The concern in dairy trade is a GATT concern now between Canada and the United States and Mexico and the United States. It is really a GATT concern, and that is where the problem lies. It wasn't really NAFTA.
    Ms. TIPTON. Our organization supported NAFTA and is for trade promotion authority or fast track.
    With respect to NAFTA, it did open up dairy markets in Mexico, but it was complicated by the fact that when that happened they had a simultaneous peso devaluation and so that sort of put a damper on the ability to sell dairy products in there for a time. That does continue to build with dairy products going into Mexico from the United States. It is not a huge market.
    Canada was left out of NAFTA. We would like to see an opportunity for more trade with Canada. We think that is a real potential. And, as I mentioned in our statement, 96 percent of the world's population lives outside of our geographic borders, and therefore we think it is to our advantage as a dairy industry to open up those markets.
 Page 63       PREV PAGE       TOP OF DOC
    I would agree, we do need some fairness brought into the trade, trade rules; and we join with the milk producers in advocating that the export subsidies in the EU be eliminated and other things be done within the next WTO round so that we can have better trade around the world in dairy products.
    Mr. CONDIT. Thank you, Mr. Chairman.
    Mr. POMBO. Mr. Stenholm.
    Mr. STENHOLM. Thank you, Mr. Chairman.
    Since milk protein concentrate seems to be the big nemesis as far as today—it used to be casein but now it is milk protein concentrate—why aren't we manufacturing it here in the United States?
    Mr. DOUMA. Because it is more profitable to manufacture nonfat dry milk.
    Mr. STENHOLM. I am asking——
    Mr. DOUMA. Because it is more profitable to put it into nonfat dry milk.
    Mr. STENHOLM. According to the numbers that I see, we don't have a surplus of milk in the United States. We are actually consuming more than we are producing. But when you take imports into consideration. Then we do have a buildup of surpluses that is creating a problem for us. And I would like to see some witnesses come before this committee, of which none have thus far, begin to think in terms of how do we compete with those who have learned to use NAFTA.
    In the case of GATT, you are correct. NAFTA has nothing to do with this. GATT is the one. But it is interesting when you see that milk protein concentrate just shoots up right after we have a GATT agreement, and other countries seem to be able to use international trade laws to their benefit more than we do.
 Page 64       PREV PAGE       TOP OF DOC
    I would love to see our cooperatives begin to look at how can we meet the market competition for milk protein concentrate. In the case of Europe, it should be relatively easy. The last time I checked, they are getting about 18, 20 dollars a hundredweight for their milk. New Zealand is going to be a little tougher, competitive.
    But since we are only talking about 2 or 4 percent of our milk that allows these depressing prices to occur, why don't we start thinking in terms of how do we take Ms. Tipton's consumers of this milk and give them what they want at a price that they are willing to pay? Why don't we think about that? Anybody?
    OK. Maybe, Mr. Chairman, another hearing down the line is going to be necessary. Because, really and truly, if milk protein concentrate is so great—it is stuffed molasses that is creating the problem in another one of our commodities. It is folks figuring ways to legally get around the law. It is fudging just a little bit in the name of the marketplace. And I don't want to say breaking the law, because if they are breaking the law a good rope and a tree will take care of them.
    But we have got to think, I think, as we develop the next dairy policy, how can we be competitive. And there is no reason why our dairy farmers cannot provide that which the manufacturers of products need at a price that is competitive. No reason for us to do that. But we allow, this time, milk protein concentrate, that very small percentage, to have a very depressed price; and for some reason we have not adjusted our support price for the last 18 months, at a time when clearly, as you say, Mr. Douma, very honestly, it is more profitable to produce nonfat dry milk than it is to do something else in certain regions, et cetera. And that is having the kind of depressing effect on the rest of the country that rightfully allows our colleagues to complain about it. But the Secretary of Agriculture has the authority to make that adjustment, has had it for 18 months and has not done so.
    Yes, sir.
 Page 65       PREV PAGE       TOP OF DOC
    Mr. LINCOLN. Let me make a stab at a couple of things here.
    I think that on the milk protein concentrate issue in particular, yes, you are right, other countries are taking advantage of some loopholes that aren't discussed or weren't put in place at the last round of the WTO. I think producers need to have a fair marketplace. I certainly am a very pro-market-oriented individual.
    But I think the other thing we have to look at is the impact on the cost structure in American agriculture, things like regulations. And I will testify tomorrow on the CAFO/AFO issue and other environmental issues put us at a significantly different level than a good many other countries.
    Labor is another factor. New York is a large apple-producing State. Our apple growers are well in a severe economic condition at this point in time because of things like Chinese apples coming in here in a concentrated form 2 to 3 cents a pound. So I think we have to take a look at, as well as agricultural policy, our whole regulatory policy, the impact upon agriculture, American business. Taxation is another issue. I know this Congress is looking at all those issues, but I think you have to have a level playing field.
    Mr. STENHOLM. Mr. Lincoln, with all due respect, Mr. Green nailed you a moment ago regarding some of your testimony today regarding the free market and Government, et cetera, and I know that you will take another look at that, but I would mention one other aspect.
    Talk about Canada and competition between Canada. When they have a 40 percent advantage over our dairy producers strictly because of the value of their currency, come on, get off this free market business. It is very difficult to compete when someone else has that much of an advantage strictly by the value of their currency.
    I do not want to see a weak dollar, but I do think it is good reason for us in our policy, in this case we are talking dairy, to make adjustments that will allow us to be on a level playing field with the Canadian dairy industry who has a totally different support price system for their dairy farmers. But I really hope that we can find ways to take this 2 percent inventory blessing that some people call a surplus, and if milk protein concentrate is what our manufacturers want and need from the marketplace, for heaven's sake, somebody make it. And if you have to be subsidized to make it, then let's come before this committee and ask to be subsidized to make it.
 Page 66       PREV PAGE       TOP OF DOC
    I will darn sure support you on that one. Because I just am tired of seeing foreigners smarter than we are. Their farmers are not more productive than we are. Their manufacturers are not more efficient. But they are able to use the laws to their advantage more than we seem to be able to. And we are still trying to make an outdated system work for us, which we are having a difficult time with.
    Mr. POMBO. Mr. Osborne, did you have any questions?
    Mr. OSBORNE. Thank you, Mr. Chairman. I had to go on the floor for a while, so I missed some of the testimony. If my question has been answered, please just tell me; and I will go sit down in the corner somewhere.
    But what I would like to ask is what you see as environmental regulations, what the impact on the dairy industry is, and if you see anything in particular that you would like to see happen, if you think would be helpful as part of the new farm bill. Anybody that would like to answer, I guess.
    Mr. DOUMA. One of the concerns that I have in just briefly reading the CAFO regulations that are out for comment, it is probably acceptable to me as a dairy farmer to have those regulations placed upon me, but it seems to me they want to define the waste holding from a regulated CAFO, that that waste then has a tag attached to it. If a farmer takes it, his land is now tagged, and he has to make all the regulations and documents, and it almost makes that product undesirable, will make it unmanageable to use. I think we are going a little bit too far with some of those regs.
    Ms. TIPTON. Mr. Osborne, I would comment from a processor's standpoint we have processors in a number of areas of the country who are anxious to attract producers to their areas so they have ample supplies of milk for their facilities and often run up against situations where there is not an ability for a farm to get a license to come into an area because of environmental restrictions. So that is why we would be supportive of working with producers to try and address some of these situations and to help producers come into compliance and be good stewards of the land. We are very supportive of those kinds of things so long as they are based on science and fact based and so forth.
 Page 67       PREV PAGE       TOP OF DOC
    Mr. LINCOLN. And another program—well, first off, in my testimony, I expressed concerns as far as the cost of proposed increases in the TMDL rules and the new proposed AFO/CAFO regulation. But I think one of the programs that has been in existence is the EQIP Program, and I certainly would encourage the continued funding and expansion of funding to this because that is one of the mechanisms to provide—well, to help offset some of the costs of the regulatory costs to the wide spot sector.
    One of the things that in my comments on regulations—one of the things on regulations that has an impact as it forces the industry to become larger, as a dairy farmer, to face all the AFO and CAFO issues in order to be able to afford those without adequate programs like EQIP, if the cost is reduced to going to more cows, your income is greater, the environmental regulations often force businesses to get larger, which has been a concern felt by consumers and Congress. So I think full funding, an expansion of funding, may make EQIP a great way to help the industry deal with some of these environmental issues.
    Mr. CARINALLI. In California, we have put together a Dairy Quality Assurance Program which attempts to take all the agencies—and they have an agreement if you meet certain qualifications you are basically certified. It is in the hope of streamlining the process, and you have don't have to deal with I think it is up to 10 agencies in California. And that has helped a lot to support the EQIP, to have it full funded.
    Mr. OSBORNE. Thank you, Mr. Chairman. Thank you.
    Mr. Chairman, I yield back the rest of my time.
    Mr. POMBO. Mr. Etheridge.
    Mr. ETHERIDGE. Thank you, Mr. Chairman.
    Let me associate myself with the comments that Mr. Stenholm made earlier. Because I think, as I look at the numbers over here, the amount of milk protein that has been coming in is a pretty good indication somebody has figured out how to work within the rules or work around the rules, whatever it may be.
 Page 68       PREV PAGE       TOP OF DOC
    But let me touch on another area as it relates a little more specifically and revisit something we talked about earlier. Within the last 25 years in my State, and I am from North Carolina, we have lost about three-fourths of our dairies. In my district, it is not a big issue. We are down to maybe one or two. The largest one in the State was in my district, and it has since closed.
    But there is one thing I do understand about the dairy and that most any other business is not unique, if your expenses are greater than your income, you are going out of business. I mean, that is just a known fact. And we are having that and we are seeing more and more consolidations for a variety of reasons. It could be environmental. It could be a whole bunch of—host of issues. But the truth is consolidation is happening. And the milk protein concentrate is some of it, but it is a bigger issue than that.
    One of the things that is happening certainly in the Southeast is, as we are seeing the dairies either consolidate or go out of business, we are becoming a much bigger importer of fluid milk. And I want to come back to the compacts for just a moment. I know there are some who may not agree with that, but it is amazing to me that those of us who talk about States' rights, and believe States help, come together; and half the States have now said, we want to form a compact, and seven or eight more States are now considering it and that the Federal Government is saying, no, no, in this area we don't believe in States' rights. We know better than you do. But in the other areas we want the States to do it.
    I am a little bit perplexed at that. I guess if you are for States' rights, you are for States' rights on the issues that you feel like States' right are for.
    But let me ask this question, because if the compacts do come together—and certainly we don't have one, but a lot of my colleagues in the Southeast would like to have one. And as I looked at the testimony of Mr. Covington, it showed that the noncompact cities are paying more for milk than some of those living in the Northeast. So I think you can find any kind of data to prove what you want to prove, but critics say this: The compacts lead to overproduction of fluid milk. And I haven't found a lot of evidence to that, but, be that as it may, let me get a couple of points more. Then I want to ask this question.
 Page 69       PREV PAGE       TOP OF DOC
    Because there is a study out by Professor Ron Cotterill at the University of Connecticut that was an independent report that showed that over $110 million of the $130 million increase in milk bills paid by the New England consumers since the compact was authorized in 1987 is due to factors other than the compact, including $50 million because of increases in the retailers or dairy processing, as a process in the change.
    His report finds that the average price of milk increased 29 cents in the Northeast from the time before the compact was established till today. Of that increase, only 16 percent, or about 4 cents, were a result of the compact; and some people would ask the question whether it is 4 cents too much to keep a dairy farmer in business and on the farm and having fluid milk available. But, because of the processing, I raise the question as I read this, it really does, through the compact, require openness in terms of sharing, of increasing and others; and at least from that standpoint, the consumer has some understanding of what the price is.
    So let me ask this question and maybe start with you, Mr. Lincoln, because you would be in the area. How—as a result of the compact in the Northeast and the requirement through the processing you have to have open scrutiny, open public scrutiny when you have an increase in price, has that led to the consumers having a little bit better understanding of what the pricing is of the milk under the compact arrangement?
    Mr. LINCOLN. Yes. Again, I think that is a very good point. As you properly note, the Commission is made up not just of the producers and the processors but also the consumers. So the consumers have a little better understanding of some of the issues, some of the cost side, the expense side that farmers face; and that all goes into the discussion as far as arriving at collectively what they feel is maybe a fair price and does give them a greater understanding and support, quite frankly, for some of the other things that dairy farmers and other farmers bring, the quality-of-life issues, the landscape issues and things to States.
    Mr. ETHERIDGE. Anyone else want to comment?
 Page 70       PREV PAGE       TOP OF DOC
    Ms. TIPTON. I would just comment, Mr. Etheridge, if I might quickly, that we think there are better ways to address a safety net for farmers than to put in place an expanded policy that limits the ability for States and regions to move products; and so we would hope that you might consider looking at some other alternatives that would be more national in scope and provide a safety net for farmers that works across the country.
    Thank you.
    Mr. POMBO. Mr. Kind.
    Mr. KIND. Thank you, Mr. Chairman.
    And I want to thank the witnesses for your presence and your testimony here today. I think this is a very important hearing. We need a very important discussion to try to resolve the challenges we all face in the dairy industry, regardless of whether you have got a producer in the upper Midwest and the Northeast or out West. So I may shock you, as a member from western Wisconsin, the largest dairy producing districts, I am not going to ask any questions on compacts right now. I think that has been thoroughly exhausted, and we are going to have enough discussion of that later on.
    But, Mr. Carinalli, let me ask you, first of all, Dairy Profit Weekly just reported recently there are roughly 772 million pounds of nonfat dry milk in storage through USDA. How can we continue justifying that program with the American taxpayer when it doesn't seem to be sensitive to market conditions or market prices? Obviously, something is not clearing the marketplace right now, and yet it is costing the American taxpayer a tremendous amount of money and resources for this program.
    Mr. CARINALLI. I really don't have an answer to that. As I said before, I think supply and demand are getting more in balance, and it will probably begin to be used; as the world market starts to come up, we will start to use it. And the question I had on that is, why is it if we have a so-called surplus of powder, it is called a ''surplus,'' and we have millions of bushels of grains out there, that is a ''reserve.'' I have a hard time with that concept.
 Page 71       PREV PAGE       TOP OF DOC
    Mr. KIND. Now, you are really looking for a fight, aren't you? You are not going to suck me into that one. I haven't been on this committee very long, but I am smart enough not to answer that.
    Unfortunately, we get to ask the questions for these hearings. But I think we do need to think.
    I think the point is—and I think it was a point raised earlier too—that we need to be able to create some programs that are in tune with market conditions and the basic laws of supply and demand. Otherwise, we are going to be encouraging things that, quite frankly, we shouldn't be encouraging in the production area.
    Mr. CARINALLI. Probably one of the answers, if the MPC thing could get straightened out—and it just hasn't been profitable for a co-op or someone to retool the whole plant to make MPC; the costs are prohibitive, and that is one. And I think Mr. Stenholm is probably correct, we could use some help, probably from the Federal Government, to retool some of these plants and make a different product.
    Mr. KIND. Let me ask all of you then, following up on the MPC issue, because obviously it is an issue that we are hearing a lot from—in our individual offices. And talking to producers, they are very concerned about the impact on the domestic price MPC is bringing. I am, however, one that has not signed on to one of the pieces of legislation meant to address this.
    I think, quite frankly, we need to resolve the WTO issue first, before we start picking a fight in that arena. And I am not sure if the legislation is going to adequately deal with some of the trade implications that it is offering, but a lot of the production, a lot of the purchasing of MPCs in this country, quite frankly, is being done by co-ops. Why can't we ask for a voluntary restraint by the co-ops throughout the country in limiting their purchases of MPCs? I mean, how practical would that solution be?
 Page 72       PREV PAGE       TOP OF DOC
    Mr. Carinalli, let's stay with you.
    Mr. CARINALLI. Well, I guess it is a competitive thing. I personally am not a member of a co-op, so I don't want to make a comment on a co-op; that is their business. I think the majority of it is competitive price advantage or disadvantage.
    Mr. KIND. In effect, it is all the same issue whether we pass legislation prohibiting the import of it or we get voluntary compliance from it in our own country from co-ops, especially that are meant to be representing producers.
    Why can't that be a viable option rather than taking on the WTO or all kinds of trade challenges that we are going to face with some type of legislative remedy?
    Mr. CARINALLI. Sounds good to me.
    Mr. KIND. Mr. Douma, what are your thoughts?
    Mr. DOUMA. That would be a good idea. I don't know that the co-ops are the only importers of MPCs. My understanding, a lot of these MPCs are not coming in truly as milk protein concentrate, but coming in as a little of this in a nonfat dry milk bag so that it increases the protein. So—it is no longer nonfat dry milk under our regulations, but it is something else, so it falls through the cracks. It really is a way to get cheap nonfat dry milk because it is fudged a little bit on the rules.
    Mr. KIND. Ms. Tipton, let me switch to you, because my time is running out here. But I find it a little bit ironic that we have a different fluid milk standard for California than the rest of the country. Would it make more sense to have one uniform standard throughout the country, and what are the policy implications of that?
    Ms. TIPTON. California does and has since the 1960's, I believe, had a higher standard. California, as you know, has a surplus of milk production, as many areas of the country do not, and so one of the reasons they put it in place was to use up some of that extra milk, and they add that to the milk from the cow.
 Page 73       PREV PAGE       TOP OF DOC
    The problem with taking that nationally is that you have got a lot of areas that don't have a surplus of milk, and they don't have a fresh supply that they could add to their product. So they would have to incorporate in some area, probably the Southeast, they would have to bring in powdered milk to add to their milk. This creates a situation where plants have to add all types of equipment. You end up with different tastes in product.
    We believe that the current Federal standard is fine. It allows companies to offer a variety of products, that are fortified and not fortified, to the marketplace; and those obviously have price differences, so it does give the consumer a variety of product choices in terms of price as well.
    Mr. KIND. I see my time has expired, Mr. Chairman. Thank you.
    Mr. POMBO. Are there any further questions?
    Mr. Pickering.
    Mr. PICKERING. Mr. Chairman, thank you. And I know most of the ground has been covered today from CAFOs to compacts to conservation issues, and I want to briefly ask your feedback on those issues.
    But I also wanted to bring to your attention a bill that I introduced in the last session and again this year that will address, I think, some of the animal health issues and human health issues that we see, especially in rural areas; and it would forgive debt of veterinarian students who have gone through and usually accumulated large student loan debt. And then, when they are faced with either going to an urban area for small animals or to a rural underserved area to work in large animal practices, for financial reasons, choose the urban and small animals.
    Would you all support legislation that would provide, much like we do for teachers or doctors, to go into the underserved and the rural areas and, hopefully, to work in large animal practices, to forgive the student loans if students decide to do so for the rural, underserved markets. And veterinarian science and veterinarian medical school loans, if you all are familiar with that, please comment; but if you are not, is that something that is needed, especially with hoof-and-mouth and some of the epidemics that we are seeing internationally?
 Page 74       PREV PAGE       TOP OF DOC
    Mr. Douma, if you don't mind starting——
    Mr. DOUMA. I don't know. I guess I don't know what an underserved rural area is. In my understanding, in large animal practices in California, there seem to be adequate vets, maybe because there is larger herd size where it is more attractive and the income source is better.
    My experience is that it doesn't appear to be a problem, attracting veterinarians into our rural areas.
    Mr. PICKERING. Mr. Lincoln.
    Mr. LINCOLN. It certainly sounds like something American Farm Bureau would be willing to take a look at.
    My experience in New York, right now we have a veterinary clinic that, well, is an older individual, has back problems. He is wanting to sell the clinic. He is unable to attract new veterinarians out of Cornell or Penn State to come in because, quite frankly, in most places in the Northeast, they can make far more money in small animal practices with shorter hours and less work. So it certainly is something that is of concern at least in our part of the country.
    And as I say, I am not that familiar with your bill, but it sounds like something we would be willing to take a look at.
    Mr. PICKERING. Let me encourage you to take a look at it, and I would appreciate any advice, counsel or support you can give in this effort.
    In my State of Mississippi we are having a problem with a shortage of veterinarians in large animal practices and what that can do not only to animal health issues, but also, as is beginning to be addressed, in human health issues as well. So for dairy farm s, for livestock, for beef, for those issues—and for poultry in my particular district—all those things are very important.
 Page 75       PREV PAGE       TOP OF DOC
    Quickly, was there consensus on compacts among the——
    Ms. TIPTON. Yes, sir, we don't need them.
    Mr. PICKERING. Mr. Douma?
    Mr. DOUMA. We would oppose a compact. We think in the long term there is an impact on the industry.
    Mr. PICKERING. Mr. Carinalli?
    Mr. CARINALLI. We really don't have a dog in the fight here, out in California, so we really don't have a position on it at this time.
    Mr. PICKERING. And Mr. Lincoln?
    Mr. LINCOLN. It sounds like I have been in the minority on this discussion here so far today in the subcommittee, but I think the fact is, there are still a number of States that have passed legislation, a number of the States looking at passing legislation.
    Again, it is a mechanism that can provide a countercyclical program for dairy farmers, which we are looking at for all commodities. It is—does not require Government expenditures, and it has been shown to be somewhat of a benefit. It is certainly not a cure-all for the dairy industry, and I don't think anyone has been promoting it as that, but it does provide benefits.
    Mr. PICKERING. Mr. Yonkers, I don't know if you want to comment.
    Mr. YONKERS. My opinion would be similar to Connie since I represent the same trade association, but we did submit a statement, an additional statement, which I think you have, and would be happy to respond to specific questions that you might have about that.
    Mr. PICKERING. Mr. Chairman, the only other thing I have is, as we look at the farm bill this year—I chair the—cochair the Sportsmen's Caucus, the largest caucus in the Congress—over 250 members, which shows where our priorities are—but one of our great missions is the conservation programs and CRP, EQUIP, any of the things that can help dairy farmers as they look at the regulatory issues facing them. And I would appreciate everyone's input as we go forward in the debate this year on both the environmental regulations and in the farm bill of how we can use conservation programs to help both the farmer and meet our environmental and conservation objectives.
 Page 76       PREV PAGE       TOP OF DOC
    Thank you, Mr. Chairman.
    Mr. POMBO. Mr. Peterson.
    Mr. PETERSON. We have had a lot of discussions here, but we haven't really focused on some of the legislation that has been put forward, and ideas put forward, to increase or to put a floor under these prices. So my question is, the national milk producers have this proposal to floor class III milk at $11.08. There are some other bills out there to put different floors in, a $12.50 floor on all milk and so forth.
    If we pass a bill like that, would we see an increase in production if we had an $11.08 floor for cheese milk, in your opinion? In your area, would farmers produce more milk, given the fact that every time we have seen a price increase, we have seen more milk come on stream?
    So if you would all just——
    Mr. DOUMA. $11.08 for cheese milk as a bottom in California on a permanent basis would definitely attract more milk.
    Mr. PETERSON. How much? Do you have any idea?
    Mr. DOUMA. To the extent you could get heifers, to 3 to 4 to 5 percent a year. The limiting factor right now in increasing milk production is heifers.
    Mr. CARINALLI. I think it would definitely have an increase—potential for increase in production.
    I think $9.90, that we have now, that Western United supports, I think does not have a production incentive in it. I think the only thing it needs is a real floor to put a real meaning to it, because when milk went to $8.57 last year, $8.50, that hurt a lot; and I don't think it is necessary and I don't think that is the intent of Congress and so on.
    Mr. PETERSON. Mr. Lincoln.
    Mr. LINCOLN. Well, I think if you are really interested, beyond looking at the market-oriented program, I think that is where—American's position has been on the target. The target is really market-oriented. It can provide additional incentives and probably would provide additional incentives for milk to be produced.
 Page 77       PREV PAGE       TOP OF DOC
    And I guess one of the other concerns I heard here today is, geographically, can they do that in certain sections of the country more than others?
    Mr. PETERSON. The compact, the increase in price in the compact doesn't have the same effect? Can I draw that conclusion?
    Mr. LINCOLN. I have pointed out what I felt were the benefits of the compact. I guess you can draw your own conclusions.
    We have had considerable discussion on that, but I think if you are looking at a market-oriented program, targeting specialty of class III as the floor and as a different approach, really, than what—I mean, it is a Government program, again, not something from the consumer or the industry, and it doesn't have some of the things to make it more market oriented, like the commission that the compact does.
    So there are some real significant differences between—in my opinion, between the compact and a targeted floor price for classes.
    Mr. PETERSON. And it also doesn't have any inventory management component, like your compact does; and if my position is—if we are going to do any flooring of prices, you know I am never going to support that unless we get a strong inventory management component, so we can control production and don't screw up the thing further. So that is one part of your compact that I think makes sense, the inventory management.
    Now, does Farm Bureau support inventory management beyond the compacts, so if we had some kind of a floor and we had an inventory management component to that, would the Farm Bureau support that?
    Mr. LINCOLN. Well, I think you know the answer to that before you ask the question. But, no, our policy does not support supply management.
    Again, it gets back to market oriented, and I think it is consistent. The supply management component of, we do support our dairy policies, do support voluntary supply management, which is what is in the compact.
 Page 78       PREV PAGE       TOP OF DOC
    Mr. PETERSON. Well, we could have voluntary supply management in one of these other schemes as well. I don't understand the difference, why it is different; but I think we have probably talked about it long enough, and thank you.
    Mr. POMBO. If there are no further questions—Mr. Stenholm.
    Mr. STENHOLM. Mr. Chairman, just a moment.
    Ms. Tipton, you testified to the effect, I believe, that there was a company in the Midwest that had purchased some wet ultra-filtered milk from someplace out in the West. Is there any difference between that wet product and the MPC that we are talking about?
    Ms. TIPTON. Primarily—well, the MPC we are talking about that is coming in as imports would be a dry product, and therefore the protein would be more concentrated than in the wet product. When you add—when you have liquid in there, it waters it down, so your concentration of proteins is not as high or as great, as I understand it, in the wet product as it would be if you dried that product; and if you dried it, it would be more equivalent to what is being imported.
    Obviously, the imports, a dry product is a lot less expensive to transport and import. You would be unlikely to get a wet product being imported both because of its perishability relative to a dry product and because of the cost to transport it with water in it.
    Mr. STENHOLM. We are going to be trying to pull together some information on the economics of this. Would you have any ballpark figure as to what your members, what is attractive, of the imported MPC?
    Ms. TIPTON. Well, it is basically, as I understand it, a cost situation right now. I mean, the nonfat dry milk in this country is being attracted into the Government warehouses by the price that is being held out by the Government.
    Mr. STENHOLM. Any figure on what we would have to do to get competitive, so that your members would not feel compelled to buy imported product, but would be able—we would be able to compete with their domestic product?
 Page 79       PREV PAGE       TOP OF DOC
    Ms. TIPTON. Well, I don't think we know exactly the answer to that, but we do know if you dropped the purchase at CCC for nonfat dry milk by about 10 cents, you would make the protein content of that nonfat dry milk relatively equivalent with the protein content, in price, of what is coming in. So we think that it would stop some of those imports immediately.
    Now, is it one for one? No, it is not. Obviously, the nonfat dry milk is not as concentrated. It doesn't have some of those properties, and I think as some of the others on the panel have commented, there would need to be some investments made in order to make this product domestically relative to what they are making now with the nonfat dry milk. But it is not attractive for them to make that investment, obviously, if they can make more money just selling the nonfat dry milk to the Government. So we are discouraging that transition here in our industry.
    And yet, clearly these new products, new technologies to filter milks and so forth and to concentrate the solids and the protein are attractive not only to the dairy industry, but to a lot of other food products. There are a lot of power bars and power drinks and things like that, infant formulas, that are using these more concentrated products. It is not just in the dairy industry, but it is really a new technology; and I think the sooner we get our prices in alignment so that our own domestic producers are encouraged to make it, the better off we are going to be.
    Mr. STENHOLM. I agree with you on that. And my final comment—again, according to GAO, there are 22 milk processing plants, four individual dairies that have full capability of making ultra-filtered wet product. Obviously the economics of shipping a dry powder that is highly concentrated would have some advantage over wet, but an ultra-filtering system has some advantage also. And distances between these plants and the markets perhaps are not as insurmountable as might be thought about before, since there are those who already have the capability. But when you look at where this milk protein concentrate is coming from and that nobody had heard of it in 1990 because it was nonexistent according to GAO, and then all of a sudden now to see—the European Union, in particular, has managed to stay up with New Zealand and, to some degree, Australia.
 Page 80       PREV PAGE       TOP OF DOC
    But New Zealand, of course, we know they are very competitive and do not have the kind of subsidization that Europe does, but Europe has managed to stay up and able to meet this price into the United States, and I think that is something that we want to look at.
    And so anybody that has got any additional information that you can furnish to the committee regarding the specifics of how we might go about this and do it on a economically sound basis and do it on a market-oriented basis, this is something that I am very interested in.
    Thank you, Mr. Chairman, for your indulgence.
    Mr. POMBO. Mr. Stenholm, just—I think it is important to follow up on your line of questioning, because we have kind of been back into this.
    And, Ms. Tipton, the folks that you represent, are they buying MPC because it is a—the ideal product for their process, or are they buying it because it is cheaper than buying nonfat dry milk?
    Ms. TIPTON. Mr. Chairman, I think probably the answer is both.
    But one of the problems here—Mr. Stenholm touched on this—is that there is not a lot of information to give us all of these answers. These are proprietary companies that are making market decisions, and for whatever reasons—one of the things that the National Milk Producers Federation suggested a few weeks ago is that they were looking at asking the International Trade Commission to conduct a section 332 investigation of what is going on in this area; and at our board meeting in April, we talked about perhaps joining with them in requesting that kind of a study, because I think there is a lack of information here, and it might be something that we could do to get more information.
    I do understand that they, since then, have kind of backed off of that and have decided instead to pursue legislation to put on higher tariffs. But I do think there is a lack of information generally about the specifics here as to who is using it, how much they are using it and why they are using it. What we could produce domestically, what that would take, I don't have all those answers.
 Page 81       PREV PAGE       TOP OF DOC
    Mr. POMBO. I would contend that the folks that you represent, if this was the product that they wanted, Mr. Douma and others would make it, and if we put ourselves in the position of chasing price on a bulk product, we will never win. Because when you are buying a bulk product, if somebody can come out with that same product and a comparable quality for 10 cents cheaper, you lose; and that is our problem in dealing with the international market right now.
    And that product that you passed around, I think is more the future of the American dairy industry than us chasing the world market price on a bulk product that the only competing factor is a minimum quality and price; and as long as we are competing against countries that subsidize their agriculture, we will never be able to beat them. And those are just the facts.
    We hear so much about the Europeans and others. Everybody we are competing against in the international market subsidizes their agriculture in one way or another, and unless we want to completely—and I don't know if there is the courage in Washington today to do this—but completely look at our agricultural policy as a whole, including our tax policy, our environmental policy and everything that goes into the inputs in agriculture, we are never going to be able to compete with that.
    That is really what has to happen, and we have to develop a tax structure that mirrors what our competitors are doing. We have to develop an environmental structure that mirrors what our competitors are doing; and that all of that has to go into it if we are going to chase a world price on a bulk product. And I just don't see that happening today; I don't think that there is the courage in Washington to take on those issues.
    Mr. PETERSON. Will the gentleman yield?
    Mr. POMBO. Yes.
    Mr. PETERSON. Following up on that, I have called a bunch of the heads of some of our co-ops and other people and asked them about MPC, and talked with some other folks, and it was explained to me that some of this is being driven by the sports drink and this whole health industry where they are making high protein power bars and high protein sports drink and so on and so forth. And one person that I talked to indicated that that was a lot of the market for this stuff and the reason that they created it was to make a high protein product that would compete with other high protein products like soy protein and so forth.
 Page 82       PREV PAGE       TOP OF DOC
    So as we examine this, I think we need to find out how much of this market is that sort of thing and how much of it is just low-cost imports getting around the tariff schedule. And as you said, we don't know that; we need to find that out.
    Ms. TIPTON. And I think one of the things we need to be careful of is to—if we limit imports of MPC that is going into some of these new products, do we drive them to nondairy ingredients? Do we drive them to oilseed proteins? Do we drive them to egg albumen and do we drive them to other protein source s?
    Certainly that is not in the best interests of the dairy industry to do that. So I think we do need to be very careful as to what action we do take.
    Mr. POMBO. I want to thank this panel for your testimony and for the answers to the questions. If there are any further questions for this panel, they will be submitted in writing. If you could get back to us as soon as possible to answer those questions in writing, I would appreciate it.
    I am going to excuse this panel. Thank you.
    I would like to call up our second panel. Mr. Tillison, Mr. Furth, Mr. Covington, Mr. DeJong and Mr. den Dulk, if you could join us at the witness table please.
    Mr. Tillison, you may begin.


    Mr. TILLISON. Thank you, Mr. Chairman. Mr. Chairman, Mr. Peterson, members of the committee, I appreciate the opportunity to be with you today. I am glad to get a chance to get up here. I have been kind of chaffing at the bit after the last 2 1/2 hours, listening to some of the answers that were given to questions.
 Page 83       PREV PAGE       TOP OF DOC
    Just briefly, the Alliance of Western Milk Producers is a trade association that represents California cooperatives. One of those cooperative members is probably the largest producer of nonfat dry milk powder in the United States. In addition to that, the cooperative also recently installed equipment that would allow them to sell milk protein concentrate, casein and so forth in the domestic marketplace.
    One of the problems that we face in that effort is that, in fact, we are, as Mr. Pombo so accurately pointed out, competing against product that is heavily subsidized. In addition to that, we believe a majority of the milk protein concentrate that is coming into the country in fact is not milk protein concentrate as we all think of it, in other words, milk in which we have taken the butterfat out and then run the skim milk through an ultra-filtration system to remove lactose and water to make a product.
    A lot of the product that is coming into this country is nothing more than nonfat dry milk powder to which either casein, that is subsidized, or whey protein has been added.
    Now, I don't think it is a question of our foreign competitors being smarter than us. I think it is a question of a lack of will on the part of the U.S. Department of Agriculture, and perhaps on the part of Congress, to enforce the trade agreements that we signed. And nonfat dry milk powder is nothing more than a modified version—I am sorry, milk protein concentrate is nothing more than a modified version of nonfat dry milk powder, far and away.
    As Mr. Stenholm so accurately pointed out, and as on page 2 of my testimony, gee, I wonder why imports of milk protein concentrate went up the same year as the GATT agreement went into effect? Could it be that we put in tariffs on nonfat dry milk powder? And suddenly New Zealand, who has no support program, who has no floor price, suddenly takes off in exporting milk protein concentrate to this country. There is no mystery there, members of the committee. The simple answer is that they wanted to get around the tariff situation.
    The Alliance of Western Milk Producers, National Milk Producers Federation, isn't asking the Congress to put any new tariffs in place. We are simply asking Congress to close a loophole. When our people sign trade agreements, we sign trade agreements that talk about nonfat dry milk powder. Well, gee, so we take a little bit of lactose out of that or we take some nonfat and dump casein in and, presto, it is not nonfat dry milk powder anymore. I am sorry, I don't buy that.
 Page 84       PREV PAGE       TOP OF DOC
    So we are not talking about increasing tariffs. We are not talking about adding tariffs. We are simply talking about putting a product under a tariff discipline that already exists.
    Yesterday I spent time talking with various members of the California delegation. We talked about milk protein concentrates. And one of the things we talked about was getting help. We were asked about putting this industry in place on our own in the United States? And as I said, some of our people have already made investments in this sort of thing.
    But the brick and mortar is only part of the solution. The other part of the solution is called fair competition, and we don't believe fair competition exists when you are competing with a product that, on one hand, is in fact somewhat of a new product where you have taken milk, you have run it through ultra-filtration equipment, and really come out with something different, versus a product that is simply a mixture of milk proteins and nonfat dry milk powder.
    So we feel very strongly that in order for us to compete, one of the keys to being able to compete is to put tariffs to make sure that these milk protein concentrates that are coming into this country are covered by the tariffs that already are intended to exist to cover those products. We are not asking for anything new.
    When Mr. Stenholm talks about, well, gee, maybe the Government would be willing to subsidize the production of milk protein concentrates in this country, a big step and a big saver of money to the Government, if that is ultimately the way we are going is to put appropriate tariffs in place on this product. Because unless you do as Mr. Pombo so accurately pointed out, we are going to be doing nothing but chasing price. And we will lose in that situation because our Government does not have the courage to stand up and say, no, we are not going to allow these other people to get away with this stuff. They don't have the courage to say, yes, let's subsidize.
    We are the fair-haired, free-market child of the world; and it is just like in the movie, ''The Hustler,'' they look at us and go, yes, come on in and sit down, we would love to have you at the table. That is one of the reasons why one of our proposals in my full testimony is that the House and Senate Agriculture Committees take equal standing with the Finance Committee and the Ways and Means Committee in trade agreement oversight. We don't need another GATT agreement in the next round, and frankly, we can't wait until the next WTO round to deal with this milk protein concentrate issue.
 Page 85       PREV PAGE       TOP OF DOC
    Yes, the Government has bought some nonfat dry milk powder and, yes, part of that is due to the fact that, you know what, people are buying a lot more butter than they are buying nonfat dry milk powder, so we have got some left; but a good portion of that can be attributed to the milk protein concentrates that are coming into country.
    My written statement has a lot more things in it, and I will close with that and be more than happy to answer your questions regarding my statement, or what I have just said. Thank you.
    [The prepared statement of Mr. Tillison appears at the conclusion of the hearing.]

    Mr. POMBO. Thank you. Mr. Furth.


    Mr. FURTH. Thank you, Chairman Pombo.
    Good afternoon, Chairman Pombo, Ranking Member Peterson, and the rest of the committee. I appreciate the opportunity to testify before your committee today.
    I have worked for the dairy farmers of Associated Milk Producers for 30-plus years. I have held the position of general manager for about the last 10 years, and the AMPI today represents dairy farmers across seven midwestern States. We represent about 6,000 dairy farmers. We market over 5 billion pounds of milk a year and pick up milk every day on over 5,000 farms.
    My testimony today, I want to point out, is representing AMPI's views, but also the views of Midwest Dairy Coalition, including members like Ellsworth Co-op, Family Dairy Association, Foremost Farms, First District Association, Lakeshore Federated, Minnesota Milk Producers Association and the Wisconsin Farm Bureau.
 Page 86       PREV PAGE       TOP OF DOC
    We believe that dairy policy can be improved as we write the next farm, bill and we believe that the dairy price safety net that we are dealing with in this committee has been interfered with by Federal Order legislation and compact legislation. Both of those things, we believe, benefit some groups of producers at the expense of others. Both have been staunchly defended by those areas of the country that see them as a way to prop up their prices. In fact, they support some areas with higher levels than others and insulate those areas from the market forces that then have to work all the harder in the other areas.
    Federal orders and compacts create winners and losers. Though I realize compacts may not be within this committee's jurisdiction, they are certainly part of today's dairy policy mix, and we would urge your opposition to their continuation.
    As you recall, those writing the 1996 farm bill chose to sunset the compacts' provisions in 1999; that is, let's not extend that policy into another farm bill. We need a national dairy pricing system and a national dairy policy that is free of regional distortion.
    You have all heard the age-old arguments about the inequities of Federal orders; Federal Order reform legislation passed by Congress in 1999 increased that regional distortion. Class I fluid prices have been increased by about $2 a hundredweight. Inadvertently possibly, but nonetheless that was the result of that legislation, thereby giving tremendous price relief to those farmers in areas with higher class I utilization.
    Please weigh in on this side of a national dairy policy as you write the next farm bill, not regional fixes that make life tougher for others.
    While we have added new price guarantees through things like Federal orders and dairy compacts, we have actually lowered the safety net on a national scale and particularly for those farmers not protected by those other pieces of legislation. The $8.57 class III price last November didn't even come close to the support price of $9.90. I believe, as an industry, we need an adequate price support coupled with the necessary inventory management and consistent dairy import policies to protect dairy producers from periodic price disaster.
 Page 87       PREV PAGE       TOP OF DOC
    Several proposals seek to improve producers' income when market prices fall below target levels. Examples of such proposals include the National Milk Class III Supplementation Program, the Senate's Santorum-Kohl bill, and bills introduced recently by Congressman Kind and introduced last year by Congressman Obey.
    The fact that dairy producers need supplemental payments of any type is testimony to the inadequacy and inequity of our national dairy policy, the inadequacy of our safety net. The AMPI believes an effective safety net for dairy producers must include a stronger—that is, a higher—dairy price support and more consistent trade policy in regard to dairy imports, such as MPC. We must also recognize that even small production increases can result in big price declines. We must be serious about managing our inventory as part of an overall safety net.
    Inventory management is an everyday occurrence in every other business. Why not agriculture? We can argue the details and the mechanisms and talk about the problems, but in the end, it is hard to argue the logic of managing our inventory.
    But even if we manage our own inventory, the world inventory is upon us, and I want to simply second the comments of Mr. Tillison on the subject of MPC. I wish I could have written it as well as he said it; I would agree with every word of it. I would urge the support of legislation introduced by Congressman Obey and Gutknecht and that would close those MPC loopholes.
    Finally, I must ask you to consider the increasing threat of disease to our industry today. Though diseases like foot-and-mouth and mad cow disease are threatening to make their way to the United States, and we are greatly concerned. There is one disease that is already here; Johne's disease is a contagious, chronic and usually fatal infection that affects ruminant animals. It is especially prevalent in dairy cattle. We would urge you to support legislation that would reduce the economic losses and clean up Johne's disease from United States dairy farmers.
 Page 88       PREV PAGE       TOP OF DOC
    As you consider another farm bill, I urge you to oppose the continuation of dairy compacts which helps some farmers at the expense of others. I propose a strengthened national dairy safety net including stronger price support, inventory management and a consistent dairy import policy; and finally I propose aggressive efforts to deal with Johne's.
    Chairman Pombo and the rest of the committee, thank you very much.
    [The prepared statement of Mr. Furth appears at the conclusion of the hearing.]
    Mr. POMBO. Mr. Covington.


    Mr. COVINGTON. Chairman Pombo, Ranking Member Peterson and members of the subcommittee, thank you for holding this hearing and allowing me the opportunity to present the views of our organizations.
    My name is Calvin Covington. I serve as chief executive officer of Southeast Milk, Inc. We are a Florida-based dairy cooperative that markets almost all the milk production in Florida and a high percentage in south Georgia. Today, I am representing Southeast Dairy Farmers Association of which our cooperative is a member and also has other milk marketing organizations and dairy farmer groups in the southeastern United States.
    I would like to summarize briefly six areas from our written testimony. Number 1, in developing the next farm bill, we encourage you to consider the relationship of the various agricultural programs to each other, especially the impact of dairy on the other commodities.
 Page 89       PREV PAGE       TOP OF DOC
    Dairy uses products from other agricultural sectors. Governmental programs for commodities other than dairy affect the economics of the dairy industry. For example, supply of feed grain is impacted by Government support, impacts the need for a dairy farm safety net program. A healthy dairy economy is a benefit to all of agriculture.
    Second, the Dairy Price Support Program at its current level of $9.90 should be extended. The Dairy Price Support Program does provide a safety net for well-managed farms, to protect them from possible disaster as a result of short-term imbalances between milk supply and demand. It does help ensure an adequate and long-term milk supply and does provide some milk price stabilization, and is a relatively small Government expenditure.
    Third on our list is that we are highly supportive of the relative value of fat to nonfat solids or the tilt in support purchase prices remaining as it is currently. A shift in the value from nonfat solids to fat will reduce income to all the Nation's dairy farmers while saving the Government only a small amount in comparison. For our members alone, a 10-cent reduction in the powder price would reduce our producers' price about 73 cents a hundredweight. Passage of the recently introduced legislation imposing tariff weight quotas on milk protein concentrate would help decrease Government purchases of powder.
    Fourth, since enactment of Federal Order reform on January 1, 2000, there has been considerable discussion regarding order reform. Our members believe reform has worked relatively well, and that reform has only been in place about 18 months; let's give it time to work before making any major changes, and if changes do need to be made, let it be done through the administrative process.
    Yes, order reform has brought attention to our region of the country due to the use of the higher class III or IV to set the class I mover price. We want to emphasize that this change has not led to increased production in our area. Hopefully, though, the higher up, the class III or IV has helped slow milk production decreases in the Southeast, an area of growing class I demand.
 Page 90       PREV PAGE       TOP OF DOC
    Fifth, we strongly endorse environmental regulations that are based on sound science and reliable cost-benefit analysis. Our dairy farmers are doing their best to meet compliance. In fact, a mandatory deduction is taken from all of our cooperative members' milk checks to help provide them with professional support in this area.
    In most cases, dairy farmers are unable to recover from the market the cost of investments necessary for environmental compliance. Many of the benefits of meeting environmental regulations accrue to the public as a whole rather than to individual dairy farmers. For this reason, assistance to dairy farmers is justified.
    And last on our list, in formulating dairy policy, we encourage you not to overlook differences in regional milk supply versus fluid demand. Milk production in the Southeast has decreased over 14.5 percent during the past 10 years, while production has increased nationally over 13.5 percent. On the other hand, population growth in the Southeast is creating a greater demand for fluid milk. In the Southeast, fluid milk demand exceeds supply, which results in a greater dependence on milk from distant areas, milk that is more costly to consumers. In short, the Southeast needs economic incentives like class I differentials and the advantages that compacts offer to help ensure that consumers have an adequate supply of milk. We ask that in formulating dairy policy, careful consideration be given to policies that support, not hinder, milk production in areas that cannot meet fluid demand.
    In closing, we thank this subcommittee for your support and efforts to continue to improve the Nation's dairy industry. Our Nation's consumers enjoy an abundance of high-quality products at a good economic value. Let's all continue to work together to help ensure that the Nation's dairy farmers will continue to help make this happen.
    Thank you.
    [The prepared statement of Mr. Covington appears at the conclusion of the hearing.]
 Page 91       PREV PAGE       TOP OF DOC
     Mr. DeJong.


    Mr. DEJONG. Thank you, Chairman Pombo, the committee. My name is Donald DeJong. I am a family farmer in Dublin, Texas. I also have two other brothers dairying in the same area. I am a member of the Texas Association of Dairymen, and I am also here representing Dairy Producers of New Mexico.
    TAD and New Mexico work together on regional and national issues. Our States respectively are number 7 and number 10 in milk production. Herd sizes in Texas average about 260 cows, and in New Mexico average about 1,400 cows.
    These two organizations strongly believe that the marketplace is the best place to receive income, control supply and demand, and dictate location and size of dairy farms. Any policy that is predicated only on addressing the legitimate concerns of 50 percent of the producers producing less than 10 percent of the milk will certainly benefit those producers and their communities but have little impact on dairy nationwide.
    You have my written testimony. I would like to address two other issues: compacts and their environment. Texas and New Mexico 5 years ago decided to take another route, and in that point the Texas Association of Dairymen differed with the dairy producers of New Mexico, feeling that compacts were the right way for us to go, looking at that as our savior. Knowing that we were running out of time, and a ruinous milk price, and we saw no way out. We have seen the pop-up of numerous new marketing cooperatives, in the process driving down our prices and the ability to get any kind of premiums that would equate to any kind of return that we needed to survive.
 Page 92       PREV PAGE       TOP OF DOC
    In 1995, Dairy Producers of New Mexico's members directed the membership cooperatives to look at solutions; and the first was a pricing cooperative. And now we have moved into what I think is unique in the country, is both the price and cost sharing marketing agency in common.'' with this ''marketing agency in common'' sharing both cost and revenues, we first looked at ourselves internally, said what we could do to return more money to dairy farmers.
    We had milk trucks passing each other, which was a big waste of money. We were fighting in different markets. We looked and said, let's bring the closest milk to the closest plants, cleaned up our distribution routes, and with that we were able to equate what we think is over 40 cents per hundredweight back to our producers in all of Texas and New Mexico.
    We also through the process developed ways of balancing our market. And one of them is ultra-filtered milk. We are currently sold out of that product, out of all of our plants. We do believe we offer proteins at an equitable price, or our plants wouldn't be sold out. But we don't have enough milk in our marketing area to keep our plants full that we have.
    We looked also at how do we return more, or how do we satisfy our buyers? With that, we went into increasing our shelf life, cleaning up our products on the farm, and again made our buyers very happy, I would believe.
    Then we approached them with a pricing mechanism that was countercyclical to production. Cash flow is a huge issue for dairy farmers. What we have turned into is a program that during low prices we do have premiums, and during high prices we actually refund portions of what we have collected. We have only had the highest collection rate 2 months, and we have actually 2 months out of the last 3 years returned money to our processors. This program has been very successful in my opinion.
    Are there challenges to the program? Yes. Is it easy every day? No. I sit on it as a director, and we do have challenges constantly. But we will not let this equation break, because the numbers that we generate are over $1.50 per hundredweight returned to our producers in Texas and New Mexico. I think you compare that to the 90 cents they are talking about in the compact, I think it is better our way. It is not easy. It is not a force situation. It is a ''sell and tell,'' and it forces us as producers and cooperatives to work together, which is not so easy sometimes, but we are able to accomplish those goals.
 Page 93       PREV PAGE       TOP OF DOC
    The last thing I would like to talk about a little bit which in my area of central Texas has become a huge issue is the environmental front. We are in, I would say, a mortal combat with our urban neighbors downstream who would like to see nothing more than animal agriculture leave our watershed. What they have been able to accomplish, to do, is to turn it into a ''cows versus people,'' and obviously people are going to win through that process whenever they can.
    We need help desperately. It is not that dairy farmers don't want to do what is right, but when we move quickly from a nitrogen-based system to a phosphorous-based system—dairy farming practices for the last 20 years have been based on nitrogen-based systems and now we are moving to a phosphorous-based system—dairy farmers need time to adapt.
    I just want to point out an ad, real quick, in the ABA Journal: ''need law firm to file large class action against hog farm corporations.'' and this is in the State of Oklahoma. We are under similar problems in our area. The city folks downstream are very well organized, have brought in outside help, outside public relations firms, to the detriment, and dairy farmers are trying to figure a way to move through this process.
    We are the original stewards of the land and we believe that we can accomplish the goals under the Clean Water Act, but we need to be able to have assistance. EPA doesn't even have the guidelines for comprehensive nutrient management plans finished yet, but our downstream neighbors are forcing us to move quicker than the country has. And I think this is the tip of the iceberg. I believe it's an achilles heel to what is happening in the dairy industry. These issues are only going to get more extreme and worse as we get through the process.
    Again, I thank everybody for their time and our ability to address the committee. Thank you.
    [The prepared statement of Mr. DeJong appears at the conclusion of the hearing.]
 Page 94       PREV PAGE       TOP OF DOC

    Mr. POMBO. Mr. den Dulk.


    Mr. DEN DULK. Thank you, Mr. Pombo, and I appreciate the opportunity to speak to the committee today. My name is Tim den Dulk and I represent Select Milk Producers, Elite Milk Producers, and Continental Dairy Products. These three co-ops together handle about 4 billion pounds of milk annually. We have producers in New Mexico, Texas, Indiana, Michigan and Ohio. And our primary market areas are the Southwest, parts of the Southeast, as well as some of the upper Midwest. And our milk products—our milk ends up in products in all four milk classes.
    Our co-ops are members of National Milk, and we would like to take a minute to express support for the billings that they have put forth regarding MPC. I agree with what Mr. Tillison said earlier: We need some help on this product. It is often an altered product that is coming in, and we need a level playing field to help us to be able to compete fairly. Our real request on that would just be that we had an equal opportunity to compete there.
    I would also like to take a minute to address the tilt and the Northeast Dairy Compact. Similar factors make us oppose both of these things, and I would start by saying that milk is sold in a national market. Milk from our co-ops is shipped all over the United States. We have had times in the summer when from New Mexico dairies we have had milk end up on both coasts. Milk products that are made from our milk are also sold nationally. So as a result, obviously our dairymen compete nationally.
 Page 95       PREV PAGE       TOP OF DOC
    When I moved to Michigan 6 years ago from California, when I go to sales or cattle sales in Lancaster, Pennsylvania, or Kidron, Ohio, or Shipshewana, Indiana, I still see the same people buying cattle that I was working with or against in California.
    The price of milk and the fairness that we all have to compete to buy heifers, also for feed; cotton seed from the South regularly ends up in the Northwest. It is not unusual for a producer in Idaho trying to buy the same stack of hay or a producer in Utah trying to buy the same stack of hay that somebody in California is trying to buy.
    We have similar costs on medicine, supplies. We have similar costs for labor. We also compete for professionals, veterinarians, nutritionists, all these things. So as a result of that, any system that is not fair to a certain group of producers over the long term is not going to work.
    We at this point, have had people testify earlier that the Government could own up to 1 billion pounds of powder by the end of the year. That is equivalent to the annual production of the States of Ohio and Michigan put together. We feel that these large inventories will reduce milk prices for years to come. Processors who will use the cheaper powder to make cheese. It is also probably a poor use of Government resources for the Government to be purchasing powder at a time right now when we have acceptable milk prices.
    So the other problem with a tilt that is unbalanced is that it creates both the higher class I and II prices, areas where high class I usage this past winter were to some degree insulated from the lower milk prices that producers in certain areas of the country really suffered through. It is not fair to balance an oversupplied market in a limited area of the country.
    We had producers in Wisconsin, Minnesota, and Idaho really suffer through this winter, while producers in the high class I usage areas received a lot better price.
    The argument that this will take money from producers is really not valid. I think it moves money from producer to producer. While we have to compete over all these items that I discussed earlier, it is important that all producers are able to compete equally and have some reasonable shot at the money that is out there to be received.
 Page 96       PREV PAGE       TOP OF DOC
    Also, we oppose compacts. Compacts in our opinion restrict interstate commerce, they raise milk prices and lower consumption. They insulate producers in the area where the compact is from market signals, so that they don't—for instance, this winter again, you had producers in the compact area receiving—having high class I usage, receiving the higher as well as some compact money, while you had a similar size producer in Wisconsin getting 857 plus a small premium.
    It is unfair to producers in surrounding areas to have compacts that can't ship their milk in and can't take advantage of markets that are available there close by.
    So I would summarize my comments for now, and I appreciate the opportunity to speak to the committee.
    [The prepared statement of Mr. den Dulk appears at the conclusion of the hearing.]
    Mr. POMBO. Mr. DeJong, am I to understand that you have a dairy?
    Mr. DEJONG. Yes.
    Mr. POMBO. Can I ask how many cows you are currently milking?
    Mr. DEJONG. We milk a little under 2,000 cows.
    Mr. POMBO. You brought up the problem that you are having that is something that I think all the dairymen are having in terms of meeting the Clean Water Act standards or the new definition on Clean Water Act. The problem that we face in the dairy industry, and this is a severe problem in California, is that because of market forces and efficiencies, we have concentrated our dairies and we have bigger dairies now.
    If the alternative to that would be either to have small dairies or to go out to a pasture-fed dairy program like they do in New Zealand and other places, if we had a dairy like yours, do you have any idea how many acres of pastureland it would take to feed 2,000 cows in your part of the country?
 Page 97       PREV PAGE       TOP OF DOC
    Mr. DEJONG. Strictly on pasture?
    Mr. POMBO. Yes.
    Mr. DEJONG. Oh, I mean, the Congressmen could probably help me on a stocking rate on past year operations in central Texas, but I don't believe that you could have more than maybe 2, 3 cows—a cow to the acre wouldn't work, I know that.
    Mr. KIND. I think the answer is a lot.
    Mr. POMBO. A dairy like yours—and I haven't spent a lot of time in your part of the country so I am not exactly sure how many acres per cow it would take—but you are probably looking at somewhere in the neighborhood of 20,000 acres just to do a pasture operation in your part of the country.
    Mr. Tillison talked about the competition a little bit from New Zealand and what that impact would be. I don't think that some of those who are filing these lawsuits have really thought this thing all the way through, because I know the cost of putting in a manure management system, and for a lot of dairymen it would mean that they go out of business because there is no way in the world they could afford to do it.
    And the alternative to that is to pasture-feed your cattle. And there are a lot of people who have advocated that we move to that kind of a system in the United States. And I don't think they realize in order to meet current production how many acres of current wildlife habitat and forestland and parkland and everything else would have to be taken up to be turned into pastureland in order to meet the current demand for dairy products in this country.
    So I think when you are talking about some of the challenges that your folks face, I think that it would be a worthwhile exercise to figure out what the alternative is to what you are currently doing. And I know that when we get further into the farm bill and talk about some of the conservation CRP and WRP and some of the other issues that are before us, I think they better realize what kind of a squeeze we are putting on our producers the further down this way that we move.
 Page 98       PREV PAGE       TOP OF DOC
    Mr. Tillison, you were talking about the challenges that we face. MPC obviously is something that is on people's minds right now, because it is impacting the market in our country. I asked the question before, but I would like to ask you: If the processors want MPC, why are we not producing it?
    Mr. TILLISON. Well, I guess one of the answers that I would give is that a couple years ago there was—in fact, it was in the last session of Congress—there was a battle over MPCs. In other words, the producer groups basically said we want to go to FDA and allow ultra-filtrated milk, such as they produce in New Mexico, to be used in standardized cheeses. And the International Dairy Foods Association said no, we want to be able to use dry MPC. To my knowledge, it has been almost 2 years now, and there has been no resolution of that.
    I worked for the Wisconsin cheese industry for 10 years, and I can tell you a cheese maker would much rather work with a wet product than with a dry product. It make a better quality product. One of the things, casein, is that when you dry it, it loses some of the oomph. And the temperatures at which you dry it has an impact on its ability as far as making a quality product is concerned. I think the primary reason that MPCs are being used in nonstandardized dairy products to a great extent is simply price. And our concern, as I said during my statement, is that the so-called MPC that is being used in fact is not MPC but simply casein mixed with nonfat dry milk powder, and that should not be allowed.
    Mr. POMBO. Thank you. Mr. Peterson.
    Mr. PETERSON. Thank you. Mr. Tillison, I commend you on your statement on this. I hate to say I told you so, as one of those that didn't vote for these trade agreements, because I have worried that we were going to get into exactly this kind of a situation.
    I would just say to all of you, be careful; because the next thing coming down the road is the Free Trade with the Americas Trade Agreement. And I just had the opportunity to go down to South America, and it hasn't happened yet, but Brazil and Chile have a situation very close to New Zealand, where they can develop a grass-based dairy industry that would be a lot bigger than New Zealand. And we have got to be careful if we set up a situation where they can get access to our market without any restrictions. It will happen, and might be some of our people down there putting it together.
 Page 99       PREV PAGE       TOP OF DOC
    So we really have got to get a handle on this whole trade thing, because it is killing us not only in dairy but in just about every area of agriculture.
    And sugar, we have a situation where they are taking molasses—there was an English company set up in Canada specifically to put watered sugar into molasses, and then they bought a company across the border in the United States to take the sugar back out to get around the trade deal. They are doing it, and we have got a bill to stop that. Because as I said earlier, I think we have got a snowball's chance in hell, frankly, of passing either one of these, because we still have the trade policies of this country tied up in those two committees in the Congress that you literally can't get on unless you are a free trader. So let's be realistic about where we are at with this whole thing.
    I commend you also for supporting an idea that I came up with 2, 3 years ago to give us jurisdiction over the agriculture part of these trade agreements. And I am not talking about window dressing, I am talking about the actual jurisdiction. Now, this is going to be a huge fight with Ways and Means, but I am not voting for any more trade agreements or any more trade promotion or anything else unless this committee gets it, because we can not afford to let this stuff keep going on. It is going to kill us.
    I am all for doing everything we can to get this thing solved, but I think it is an uphill battle legislatively, and I don't know how much chance we have got through the WTO mechanism, but——
    Mr. TILLISON. Well, Mr. Peterson, it has been my pleasure for the last 2 years to serve on the USDA Animal Trade Advisory Committee that we don't talk as much as we listen.
    One of the interesting things about serving on that committee is that each meeting that we have, we meet three times a year probably, we get reports on what is happening in the world of trade as far as animal products are concerned. Most of the time is spent getting reports from people at USDA who tell us about how our various, quote, trading partners, end quote, aren't meeting their obligations regarding our trade agreements.
 Page 100       PREV PAGE       TOP OF DOC
    I sense among the USDA people who are in the trenches a tremendous amount of frustration in the fact that when it comes to dropping the hammer, there just doesn't seem to be the will to do that sort of thing. And that is why we think that part of this whole MPC question has got to be passage of H.R. 1786 or the Dayton bill. And I understand, I understand that it could be a tough uphill fight, but I remember in 1996 no one thought the Northeast Dairy Compact would happen either.
    So I think if we get people like Mr. Stenholm and yourself and Mr. Pombo, a bipartisan approach to this situation, I think we can make some headway.
    Under the GATT agreement, for example, when you talk about whole milk powder—and there is a tremendous market for whole milk powder in the world—we signed an agreement that right now limits us to being able to subsidize 34 metric tons of whole milk powder in the world marketplace a year. The European Union's authority is for 1 billion pounds. Now, what kind of person sat down and signed that deal is the question I have to ask.
    So the frustration that dairy has, I am sure the cattlemen, the hog producer, a lot of agriculture has—and that is why we support, Mr. Peterson, I believe we supported it 3 years ago—the idea of the Agriculture Committees of the Congress having oversight on the agriculture situation. Because otherwise we will continue to be the dumping ground and the people that basically are paying for, the producers sitting at this table, that are paying for part of our foreign policy in this country.
    Mr. PETERSON. If I could make one last comment. I also called some people that make cheese and so forth, about why is this MPC coming in. They basically told me that to try to use it in cheese doesn't work really. It is not really a good product to put into cheese. And apparently some have tried it, cheddar cheese and some of these others, where you are not supposed to be using it. It is not really a viable situation anyway. So I think it is clearly being driven more by cost, unless there is, say, a much bigger market for power bars in this country than I am aware of.
 Page 101       PREV PAGE       TOP OF DOC
    Mr. TILLISON. Apparently there was an explosion in the health food industry around 1995, Mr. Peterson.
    Mr. POMBO. Mr. Gutknecht.
    Mr. GUTKNECHT. I think I should just yield my 5 minutes. Mr. Tillison, I find myself in agreement with virtually everything you said. We appreciate all your testimony and being here today.
    Ultimately, though, I think everybody on this side of these desks agrees with one thing, and that is there is a tremendous amount of empathy for America's dairy producers. Up in our part of the country, I mean every morning at 5:30 the lights go on in those farms, and it is 365 days a year. It is different than any other industry. And so we do have to come up with dairy policy here in the United States that really at least allows them to make a good living at it. If anybody in the agriculture business deserves a decent living, it is our dairy farmers.
    I think we have been over the dairy compact issue so much today that I really don't want to replow that ground. I think on the MPCs, I strongly agree that—let me say it this way. The late Senator Everett Dirksen said, ''The more I feel the heat, the more I see the light.''
    I believe we shouldn't have to have an act of Congress to get this thing resolved. I think this was an oversight. This was a glitch, if you will, in the trade agreement. And it strikes me if we can turn up the heat enough, particularly on the Commerce Department, that perhaps we can get that loophole closed without an act of Congress. It is going to be difficult to get something passed in both the House and Senate that we can all agree on and ultimately get it to the President's desk, I understand that. But we do have to make a serious effort, because it really puts a hole in our whole trade policy. And I also agree that as we look back on some of the trade agreements that we have signed over the last several years, it is hard for me to believe in retrospect that we agreed to some of those terms.
 Page 102       PREV PAGE       TOP OF DOC
    But I want to come back in the couple of minutes to have perhaps have a little exchange with the chairman about this whole issue we call the rotational grazers. I think we really do have to seriously think about what we are going to do in the next farm bill relative to those folks who are grazing. And I have got some in my district, I think Mr. Kind has some in his district. In many respects they are doing a lot of good things. They are good for the environment. They are certainly not contributing in a significant way to any of the budget or surplus problems we have, because they get virtually nothing from the Federal Government now.
    And it strikes me that as we look at the next, whether it is through the dairy title or whether we are looking at conservation programs, we at least need to recognize that rotational grazing makes some sense and some of these guys are making good money even at incredibly low prices for the dairy that they receive.
    And so I just hope as we go forward, we can all work together to at least not punish these rotational grazers. I don't know if it is the wave of the future. I don't want to say to my dairy producers, you have to have 1,400 cows or you have to have 60 cows or 125 cows. I don't think that is our job. But I think we ought to at least carve out some kind of fairness for those people who have chosen to go down the road of rotational grazing, because in our part of the country it makes a whole lot of sense from an environmental perspective and a whole lot of other areas. I yield back my time.
    Mr. POMBO. All I will say is that I think the marketplace will drive whether or not we go to rotational grazing in this country. I know when my grandfather started the dairy right after the turn of the century, that is what they did. And that was the dairy industry in the United States to a large degree at that time. Because of efficiencies, we have gotten away from that. In some parts of the country it may make sense. You may see some of that happening. And I don't intend on doing anything that will damage those that made that choice. But I will tell you that in order for the entire industry to go over to rotational grazing, we would have to have more pasture ground than exists in the United States. And if we make that decision, that we want to get away from the concentrated dairies, if as a society, as a Congress, we make that decision, then we are also making the decision that we are going to also rely very heavily on imported dairy products, because we will not produce enough in this country to meet demand. And we are going to have a whole heck of a lot more dairy farmers go broke than what you are experiencing right now, because there is no way that they are going to be able to meet that demand.
 Page 103       PREV PAGE       TOP OF DOC
    Mr. Condit.
    Mr. CONDIT. I can see it now: free range cows.
    I want to thank the panel for being here today. I know it has been a long day for you. I will ask you the same question that I asked the other panel. Did your group officially take a position on NAFTA, fast track, and, if you want to, GATT as well. If you did, just say so; if you want to say something about it. If you didn't, say so. I will start with Mr. den Dulk.
    Mr. DEN DULK. We don't have an official position on NAFTA or GATT.
    Mr. DEJONG. I believe TAD at the time took a position in favor of NAFTA. I can't speak for dairy producers in New Mexico.
    Mr. COVINGTON. We do not have an official position. The only thing we ask is that we be able to compete on a level playing field.
    Mr. FURTH. It is hard to give a simple yes or no answer.
    Mr. CONDIT. You don't have to.
    Mr. FURTH. Our group was generally opposed to GATT and NAFTA as having the potential to take our dairy farmers' prices down to world market. We don't think it has happened. We don't think it has had much impact period, good or bad, but still think there is a great deal more downside than upside for dairy.
    Mr. TILLISON. We supported NAFTA and fast track, and I think if we had to do it over again, we probably wouldn't be in that situation today.
    Mr. CONDIT. That is why I saved you for last, Mr. Tillison. Mr. Tillison, also would you—you are from California. Could you respond to the same question I asked the other two gentlemen from California about energy costs and what it is doing to the industry? And if you think it is having a major negative impact, is there anything the Federal Government or USDA should be looking at to do?
 Page 104       PREV PAGE       TOP OF DOC
    Mr. TILLISON. Well, I think when you look at the people that—I represent dairy cooperatives. About 80 percent of the milk in California is marketed by dairy cooperatives or processed by dairy cooperatives. Obviously those cooperatives are owned by dairy producers. For butter powder operations, energy makes up almost 20 percent of their cost of operation. Now, that was in 1999 that it made up 20 percent of the cost of operation. For cheese plants it is about 10 percent.
    I read an article in the Los Angeles Times the other day, and the cost of delivering natural gas to New York State from Louisiana was 44 cents on this particular day. On that same day, the cost of delivering natural gas to the border at California was $8.97. Now, I am sorry, but I don't think that is the marketplace at work. I think that is market manipulation and price gouging to the ultimate.
    One of my members is a small cooperative in northern California. His energy costs, and he has got 80 producers that own this cooperative—he processes about 1 million pounds of milk a day, and it is primarily ice cream, but also into butter and powder—his energy costs on an annual basis are going to go from about $700,000 to $1.3 million this year. And you are talking about 80 producers sharing $600,000 in increased energy costs that they will not be able to at this point recover from the marketplace because they do compete in a national market.
    We are following very closely the situation with FERC. We are doing everything we can at the State level. One of the things that is somewhat disconcerting is that we have about—well, we have over 1,500 megawatts of standby generation capacity in agriculture alone. But as of yet, there is no plan in place to allow us to coordinate the use of all that power sitting right there to help shave some of the peak situations that we run into.
    So we would like to see certainly something done regarding the natural gas situation. There is just no reason for natural gas prices at that level in California.
 Page 105       PREV PAGE       TOP OF DOC
    One of the people that participates in a national—or an organization that we formed in California has a plant in New Mexico, and he pays about 20 percent of the price of natural gas coming out of the same pipeline at his plant in New Mexico as he does at his plant in Lamoor, California. There is something wrong. And I believe that only Congress can really take action to address this situation.
    Mr. CONDIT. Thank you.
    Mr. POMBO. Mr. Kind.
    Mr. KIND. Thank you, Mr. Chairman. That is one of the nice aspects of producing in the upper Midwest, we may experience the occasional whiteouts, but we have never had a rolling blackout yet. So my producers are still online and able to function reasonably well with reasonable energy prices.
    I want to welcome Mr. Furth here today from the upper Midwest. And Paul Topp, who is one of my dairy producers from my district, from the Rice Lake area of western Wisconsin, almost ground zero for the Federal order of reform, being just 50 miles from Eau Claire, Wisconsin.
    Mr. Tillison, let's pick up with you again. I think MPCs is kind of a microcosm of what is happening right now with our trade policy. My question to you is, how can we better anticipate the next MPC problem in trade, given the advent of new research that is going on, the development of new products? Because obviously when the last round was negotiated, MPC wasn't on anyone's radar screen, and yet here we are now talking about the loophole that needs to be closed. And you have had quite a bit of experience on trade policy on that. Do you have any thoughts on how we can better anticipate the next MPC problem with agriculture trade issues?
    Mr. TILLISON. Well, I think that we are maybe going to have another trade round in the near future. And by the near future, I mean probably within the next 10 years. The current GATT agreement runs out in 2003 essentially. It may continue at that level unless we have another situation.
 Page 106       PREV PAGE       TOP OF DOC
    I think what we need to do is—if we had gone into these negotiations, not talking about nonfat dry milk powder or talking about cheese or talking about butter, but talking about milk powders, for example, that would have gone a long way toward addressing this situation. Somebody talked about going to the WTO regarding resolving this whole issue of MPCs. Well, I think it has been almost 3 years now, Mark, hasn't it, where National Milk had joined others in trying to prevent Canada from doing something regarding trade, and there still is no resolution to that situation. So to us that is not a viable alternative.
    I do think that having oversight in the Agriculture Committees of trade agreements will do a lot to assuage that, and hopefully you will refer to people like National Milk and the Alliance and other groups that are testifying here today that really do basically agree on the idea of fair trade and address it that way.
    Mr. KIND. I think we may be twiddling our thumbs for quite some time before that happens, convincing Ways and Means to give up their jurisdiction in that area. Talk about an uphill fight.
    Let's get back to the nonfat dry milk, especially that being produced on the west coast. It is my understanding that we have some Asian customers that would like to buy out some of that powdered milk on the west coast, but their market price is 85 to 88 cents a pound, whereas we are purchasing it domestically in the USDA program at a buck-one. So obviously it is not clearing the marketplace and we are not being able to take advantage of some export opportunities. What can we do?
    Mr. TILLISON. I think one of the things that—I don't see dropping our purchase price of powder by 5 or 10 cents a hundredweight is really doing anything, because we are competing against subsidized products. The people that you are talking about are probably cherry pickers that are looking for a fast deal. To compete in the world marketplace and get customers—milk powder is not just this milk powder product; the products that they want to buy over there are very specialized products.
 Page 107       PREV PAGE       TOP OF DOC
    Frankly, they don't look at the United States right now as a viable alternative, because of the situation where our nonfat powder prices are always being undercut just enough. So it is difficult for us to create a real marketplace for nonfat dry milk powder.
    And again I agree with Mr. Pombo and his comment that we can't chase the price of someone who is willing to subsidize product as much as the European Union is.
    Mr. KIND. Mr. Furth, let me ask you, why aren't we doing a better job of producing our own MPCs domestically?
    Mr. FURTH. Simply can't compete with the price. It is strictly price.
    Mr. KIND. Did I hear your testimony, Mr. de Jung, correctly? Are you producing some MPCs in Texas?
    Mr. DEJONG. Ultra-filtered milk. We take the water, which is concentrated——
    Mr. KIND. So it is just basically a price situation.
    Mr. FURTH. It is not a technology issue. We are totally capable of producing milk protein concentrates. It is a price issue. It is coming in here so that somebody else can dump their surplus in here and we haplessly stock it up in CCC.
    And I disagree with the earlier testimony from the earlier panel that if we simply would lower the price on nonfat, it would take care of the MPC issue. Absolutely not. There isn't any reason why they wouldn't drop their price down. If you dropped yours a dime, they are going to drop theirs a dime. They are not going to dump it in the ocean, they are going to bring it in here at whatever price they have to get rid of it.
    Mr. KIND. I would like to ask Mr. DeJong one more question. You are talking about the problem you are having with water quality down there, and some of the residents pitted against the producers. Are there any viable conservation programs that you would be interested in participating in, that would be beneficial to the watershed area in which you are producing, that you are not able to or just can't financially afford to participate in?
 Page 108       PREV PAGE       TOP OF DOC
    Mr. DEJONG. I don't know exactly where you are going, but I think that really we are—our urban center is 123 miles below where most of the dairies are, and I would say that compliance through the dairy farmers is very good. There is a lot of misunderstanding of what is happening, what is going on, what dairy farmers are doing to meet a lot of those requirements that have changed every year for the last 10 years, it seems like.
    Mr. KIND. Maybe I heard you wrong. You are meeting the water quality standards, but it is just very costly for your operation to do that.
    Mr. DEJONG. Absolutely. That is it. And our downstream neighbors would like to move it quicker and faster. One of their proposals was to reclassify manure as a pollutant and turn basically all of our waste application fields, all of our cornfields, all of our crop line, into point source pollution which, with us having over 30 inches of rain annually, would be for us to contain any water off of those applications fields. And we have got to have some education, some understanding between everybody, between urban and rural, so that everybody understands what is happening, and we need that dialog to start happening. As soon as it has been polarized like it has between the city of Waco and us, we have lost.
    Mr. KIND. Thank you, Mr. Chairman.
    Mr. POMBO. Mr. Peterson.
    Mr. PETERSON. I wanted to ask, you are in favor of compacts?
    Mr. COVINGTON. Yes, the organization is. Yes.
    Mr. PETERSON. If we increased the class I differentials for the Southeast, would that obviate the need for a compact?
    Mr. COVINGTON. It would help. Or either we could have—like, for example, in Florida, we have been very fortunate with our cooperatives in Florida to be able to maintain some very high premiums, which has been able to help hold up our class I price. If that could be done in other parts of the Southeast, it would be very helpful.
 Page 109       PREV PAGE       TOP OF DOC
    Mr. PETERSON. I hear from some people, I think in Tennessee and some other places, that there is some kind of a penalty when you guys are short of milk, which you are some times of the year, you have to bring the milk in—do you have to pay some kind of penalties to bring this milk in under the current system?
    Mr. COVINGTON. Years back, there were some plants down there where producers, if their production in the fall when milk was needed greater was a certain percent lower than what it was in the spring, there were some changes in prices on those producers where they had to pay more than maybe producers who had higher production in the fall. But those plans are long gone.
    But I know in our cooperative, we do have to bring quite a bit of milk in in the fall, and that is very expensive to do. In fact, what we do, we accumulate money throughout the year to help bring that milk in, because it costs us more to bring it in than what we can get out of the marketplace.
    Mr. PETERSON. That is transportation costs?
    Mr. COVINGTON. Transportation, give-up charges.
    Mr. PETERSON. Where does that go, the give-up charges? I think that is what they were talking about.
    Mr. COVINGTON. We have to compete for that milk with other users. So we have to go north to get that milk.
    Mr. PETERSON. So you pay the cooperatives in the North.
    Mr. COVINGTON. There are over-order charges and handling charges we pay above the minimum in order to get that milk.
    Mr. PETERSON. Is there any way that the Government could get involved in that and try to help you with the give-up charges to—I am sensitive to your needs in the Southeast. There is no question it costs more to produce milk down there with the heat problems and everything that you have got, feed situation.
 Page 110       PREV PAGE       TOP OF DOC
    It is just that these compacts, I don't think, are the most efficient way to deal with this. I understand why your producers are looking for help. Our producers, if we had 100 percent fluid utilization, we would be all for compacts, too. But I think it is going to eventually cause us problems if we end up Balkanizing this industry where you have all the States running the policy.
    So we would like to sit down with you and work with you to see if there are ways to deal with your problems in the Southeast—because you are never going to make enough milk to put into our market anyway. It seems to me there are other ways that we could work through this, and we would be happy to sit down and talk to you about it.
    Mr. COVINGTON. We appreciate your response on that. We would love to cooperate with you on trying to come up with something.
    Mr. POMBO. I want to thank the panel for your testimony and for answering the questions. We do have a vote on the floor so I am going to cut this off right now. Thank you very much. And if there are any further questions for this panel, they will be submitted to you in writing. If you can answer those in writing for the committee, I would appreciate that.
    The record for the hearing will remain open for 10 days to accept any additional statements or additional information that anyone would have that they want to add onto the official hearing record. So thank you very much. And the hearing is adjourned.
    [Whereupon, at 1:30 p.m., the subcommittee was adjourned, subject to the call of the Chair.]
Statement of Mark Furth
    On behalf of the dairy producers of Associated Milk Producers Inc., I want to thank Chairman Pombo, Ranking Member Peterson and other members of the subcommittee for allowing me to testify.
 Page 111       PREV PAGE       TOP OF DOC
    For more than 30 years I have worked for Associated Milk Producers, more commonly known as AMPI. Since 1990, I have been the dairy cooperative's general manager. Today, we have 6,500 members in seven Midwest states, marketing $1 billion of dairy products.
    AMPI is also an active member of the Midwest Dairy Coalition and the National Milk Producers Federation.
    Today, my comments will reflect AMPI's views on national dairy policy and how it can be improved through the next U.S. farm bill. I will focus on three areas of U.S. dairy policy, namely: regionally-based dairy policies, producer safety nets and the threat of disease.
    First, let's examine regionally-based dairy policies such as dairy compacts and the Federal milk market order system.
    Both benefit some groups of producers at the expense of others. Both are staunchly defended by areas of the country that see them as a way to prop up their prices.
    To make this price discrimination worse, reliable economic studies by the likes of USDA, FAPRI and Cornell show that relatively higher prices for some actually lower prices for other dairy producers. Federal orders and dairy compacts create winners and losers.
    Though I realize dairy compacts are not within this committee's jurisdiction, they are part of today's overall dairy policy mix and you should oppose their continuation. As you recall, those writing the 1996 farm bill chose to sunset the compact's provisions in 1999. Let's not extend this policy to another farm bill.
    Midwest dairy producers know:
     Compacts disadvantage dairy producers outside the compact area.
     Compacts result in lower prices for milk used in cheese, butter and nonfat dry milk.
     Compacts create a fragmented and regionally divisive U.S. dairy policy.
     Compacts are trade barriers within our borders.
 Page 112       PREV PAGE       TOP OF DOC
    We need a national dairy pricing system and national dairy policy that is free of regional distortions.
    Dairy is a national market with supply/demand setting the price and balancing the market for most products. Class I fluid use is a shrinking part of total production and an increasingly ineffective and unfair way to support the industry.
    You have all heard the age-old arguments about the inequity of the Federal milk market order system. The Federal order reform legislation passed in 1999 only increased regional distortion. Class I fluid prices have been raised, giving price relief to farmers with higher class I utilization and the benefit of Federal order price control. Please weigh-in on the side of national dairy policy, not regional fixes that only make life tougher for others.
    While we've added new price guarantees such as Federal order reform and dairy compacts for some areas, we have actually lowered the safety net on a national scale. That takes me to my second point: establishing a national dairy safety net.
    I believe, as an industry, we need a meaningful price support system coupled with the necessary inventory management and consistent dairy import policies.
    Other credible proposals seek to supplement producers' income when market prices fall below specified target levels. Examples of such proposals are the National Milk Producers Federation Class III supplementation, the Senate's Santorum/Kohl bill (S. 294) and bills introduced last year by Congressman Ron Kind (H.R. 5051) and Congressman David Obey (H.R. 5649). The benefits of these programs can be effectively targeted toward those producers who are in need, without causing major market distortions.
    However, the fact that dairy producers need supplemental payments of any type is testimony to the inadequacy and inequity of national dairy policy. AMPI believes that an effective safety net for dairy producers must include a stronger dairy price support program and a more consistent trade policy in regard to dairy.
 Page 113       PREV PAGE       TOP OF DOC
Statement on Interstate Dairy Compacts, Presented by the International Dairy Foods Association

    Even though interstate compacts clearly come under the jurisdiction of the Judiciary Committee because of the importance of their review with respect to impacts on fundamental interaction between states as set forth by our Constitution, the unprecedented use of such a compact to set milk prices has effects on dairy markets that cannot be ignored by this subcommittee. Recent and new research, including government and university studies, confirm that the Compact has caused New England retail milk prices to stay at significantly higher levels than they would have been without the Compact. The Compact has cost New England consumers $140 million thus far, disproportionately hurting those who can least afford it in order to benefit larger dairy producers.
    The higher fluid milk product prices resulting from the compact have a far greater impact on households with small children, which typically consume more milk than the average household but often have lower incomes, and households living on fixed incomes, as many senior citizens do. Such households spend a higher portion of their disposable income on food in general, and fluid milk products in particular, and so experience greater economic stress due to higher fluid milk products prices than higher income households.
    If expanded, dairy compacts could raise milk prices for nearly 80% of U.S. consumers (see Figure 1). What was supposed to be a temporary deal for New England now threatens to become a permanent price-fixing scheme in up to 35 states, according to legislation recently introduced. This vast compact expansion could force milk drinkers to pay well more than $2 billion a year in higher milk prices.
    Dairy compacts have been sold to policy makers as the way to keep dairy farms in business. Yet despite transferring tens of millions of dollars from New England consumers to dairy producers in Vermont, Vermont dairy farms have continued to go out of business at an equal or even faster rate than prior to the Compact (see Figure 2).
 Page 114       PREV PAGE       TOP OF DOC
    Compacts hurt dairy farmers in other regions. Compact price premiums have brought on greater milk production in New England than would have occurred without the Compact. As milk production increases in the compact region, surplus milk is forced out of the region in the form of manufactured products. This drives milk prices down for dairy producers elsewhere because they must compete in a market that has a greater supply available. Expansion to more states would only exacerbate the problem, creating a greater oversupply. Even within compact regions, as milk production increases, it will require that milk prices be pushed higher and higher to maintain the same level of income to the farmers. This will increasingly hurt milk sales.
    The compact commission in New England has attempted to address this problem within their region by implementing supply controls. These force consumers to pay more but deny any production response. This is a policy direction that has been repeatedly rejected by Congress.
    Dairy compacts only offer a short term gain to producers, but at the expense of consumers and eventually at the expense of lost markets for milk.
Statement of John Lincoln
    Mr. Chairman, members of the Committee, my name is John Lincoln. My wife Anne and I operate Linholm Farm in Bloomfield, New York. Lincoln Farm is a Registered Holstein Dairy Farm and the milk produced is marketed through Upstate Farms Milk Cooperative. I am President of the New York Farm Bureau and serve on the Board of Directors of the American Farm Bureau Federation.
    The American Farm Bureau Federation represents more than five million member families in all 50 states and Puerto Rico. It is significant to note that milk is one of the very few agricultural commodities produced in all fifty states and Puerto Rico, and that Farm Bureau has a major presence in each state and with milk producers across the country.
 Page 115       PREV PAGE       TOP OF DOC
    We appreciate the opportunity to once again discuss Farm Bureau's recommendations for the future of dairy policy. While we presented some details in relation to dairy on February 28, 2001, we believe that the dairy sector provides unique situations compared to other sectors of agriculture, and therefore requires unique solutions. Since milk is highly perishable, does not store easily, and requires special handling, farmers must market their product virtually every day of the year, regardless of the market price at that moment. This has, generally speaking, required more government intervention than required of most other commodities.
    Since the enactment of the Agricultural Act of 1949 milk prices have been supported by the government. Since 1981 that support level has been established by Congress either at specific-minimum price levels, or to a formula tied to anticipated Commodity Credit Corporation (CCC) dairy product purchases. Since January 1, 1999 the support price for milk containing 3.67 percent fat has been $9.90 per hundredweight. The current program is scheduled to end on December 31, 2001.
    It is imperative that the dairy price support be reauthorized at $9.90 per hundredweight prior to October 2001. This would make the dairy program consistent with other commodity programs and maintain a safety net for dairy producers. The program provides a standing offer to purchase butter, powder, or cheese if market prices are less than established levels that would allow processors to pay producers the support price. The dairy price support program should be extended with a support price of $9.90 per hundredweight.
    A related issue is the butter/powder tilt. Prior to 2000 this issue did not pose much problem for the dairy industry. Such an adjustment would have severe negative consequences on total dairy producer pay prices and total dairy farmer income. USDA could, as they have done in recent years, purchase substantial amounts of nonfat dry milk (NDM) but no butter under the dairy price support program. This usually prompted USDA to adjust the relative CCC purchase price for butter and nonfat dry milk by lowering the CCC purchase price for nonfat dry milk and raising the corresponding butter purchase price to keep the combined support equal to $9.90 per hundredweight.
 Page 116       PREV PAGE       TOP OF DOC
    However, the new Federal orders effectively changed the way the price support and Federal order programs interacted. The new formulas include the following: 1) a class IV price computed directly from butter and nonfat dry milk prices; 2) a class II price linked directly to the class IV price; 3) and class I prices driven by the higher of class III and class IV. The recent result has been that class IV has been driving all but class III prices. This makes the majority of producer income directly tied to butter market prices and the CCC purchase price for nonfat dry milk (NDM). As a result, dropping the CCC purchase price for nonfat dry milk would quickly reduce class I, class II, and class IV prices by about the same amount, and the all-milk price would drop by about 60 percent of that amount. Therefore we ask that the butter/powder tilt not be adjusted when the dairy price support program is extended.
    The cost to producers if the tilt was adjusted would potentially be $850 million annually. For example, a reduction in the CCC purchase price for NDM of 10 cents a pound would reduce average milk prices received by U.S. dairy farmers by about 52 cents per hundredweight. At the current level of milk marketing, this would reduce U.S. dairy producer income by about $850 million annually.
    Farm Bureau supports S.847 and H.R. 1786, the Milk Protein Concentrate Dairy Trade Bill, as a solution to a portion of the dairy import problems. Since CCC purchases of nonfat dry milk are, in part, due to displacement of domestically-produced nonfat dry milk by unrestricted imports of milk protein concentrate and casein, reducing the price for nonfat dry milk would not result in CCC purchasing much less nonfat dry milk than they do presently. So reducing the price of nonfat dry milk would result in much lower prices for producers in the U.S. but would not save the government significant expenditures. Rather, the most effective means to reduce CCC purchases of nonfat dry milk would be to limit the amount of imports of protein concentrate and casein into the United States, as most other dairy product imports are limited.
 Page 117       PREV PAGE       TOP OF DOC
    When the U.S. established tariff rate quotas (TRQs) the technology to both produce and use concentrated milk proteins was in its infancy. Therefore, the United States did not create any significant tariffs or quotas for milk protein concentrate as was developed for other dairy products such as cheese, butter, and nonfat dry milk. As a result milk protein concentrate imports have risen more than 600 percent in the six years since the implementation of GATT. At the same time other nations are ensuring that milk protein products are not imported into their countries.
    A recent GAO report documented the increase in imports. The report states:
    Milk protein concentrate imports increased rapidly from 1990 to 1999 from 805 to 44,878 metric tons—and nearly doubled between 1998 and 1999. Six countries—New Zealand, Ireland, Germany, Australia, the Netherlands and Canada—accounted for 95 percent of the imports in 1999. Exporters of milk protein concentrates face few U.S. import restrictions: no quotas limiting the import quantity, low duties, and a broadly defined classification under which these products are imported that includes concentrates of any type if they contain 40 to 90 percent milk protein.
    In addition, Farm Bureau supports H.R. 1016 which would prohibit the FDA from changing the cheese standards to allow the use of dried ultra-filtered (UF) milk concentrate in cheese making.
    U.S. dairy producers have large investments in their cooperatives' manufacturing, processing and marketing activities in order to provide U.S. consumers with the finest quality cheeses. Allowing dried forms of UF milk to be used as an ingredient in cheese making could compromise the quality and nutritional component of our cheeses.
    The Northeast Dairy Compact has been in place over three years. Dairy compacts establish a minimum price for fluid milk at the farm level through a regional pricing compact, thereby reducing volatility in the prices received by producers and also assuring that prices are at a level that will cover the cost of production for the majority of producers in the region.
 Page 118       PREV PAGE       TOP OF DOC
    The Compact Commission is comprised of producers, processors and consumers and has the authority to regulate the farm price of class I (fluid) milk in the six northeast states covered by the compact. It establishes price regulation by way of a formal rulemaking process. All milk consumed in the compact-affected area is uniformly regulated. School lunch programs and other food programs have not been harmed due to price increases, and steps are in place to control the supply if milk supplies increase in the compact-affected area.
    The compact has paid over $135 million to nearly 4,000 dairy farmers in New England and eastern New York State. It is projected that if the farmers in the twenty-five states that have passed state compact legislation had been active members of an interstate-compact in 2000, they would have received over $500 million.
    If the concept of ''market oriented'' includes producers getting their income from the market, the market sending price signals to producers and having a fair price to consumers, the dairy compact meets these standards. There are no government payments; the revenue is from the market. The Compact Commission that determines the compact price is comprised of consumers, processors and producers. The producers who have the most visible benefit from compact pricing are a minority of the members of the Commission and therefore are not in a position to drive the price.
    Mr. Chairman, we realize this committee does not have jurisdiction over the dairy compact legislation, but the issue is very important to our dairy-producing members. Farm Bureau supports H.R. 1827 introduced by Reps. Hutchison, Etheridge, Sherwood and McGovern.
    Farm Bureau strongly believes that export markets and export development are vital to the growth of any commodity program. Dairy is no exception. The Dairy Export Incentive Program (DEIP) helps exporters of dairy products develop new markets and compete in markets where U.S. products are otherwise not competitive because of subsidized products from other countries. The annual U.S. DEIP limits on dairy products, as imposed by GATT, are 21,097 metric tones of butterfat, 68,201 metric tones of nonfat dry milk, 3,030 metric tones of cheese, and 34 metric tons of other dairy products. These numbers are frozen at current levels until changed by a new round of WTO talks. We recommend that DEIP be reauthorized at the maximum levels permitted.
 Page 119       PREV PAGE       TOP OF DOC
    The Market Access Program (MAP) uses funds from USDA's Commodity Credit Corporation (CCC) to help U.S. producers, exporters, private companies, and other trade organizations finance promotional activities such as consumer promotions, market research, technical assistance, and trade servicing for U.S. agricultural products. Farm Bureau encourages funding of the MAP program at $155 million.
    The Foreign Market Development (FMD) program helps develop, maintains, and expands long-term export markets for U.S. agricultural products. Farm Bureau encourages funding of the FMD program at $33.5 million.
    Farm Bureau also encourages that other food programs such as P.L. 480, also known as the Food for Peace program; the Section 416 (b) program, also known as the Food for Progress program, and the Global Food for Education Initiative all be funded in a manner that provides a consistent level of resources to make these programs effective on a long-term basis.
    Related to export programs, Farm Bureau supports legislation that would change the Dairy Production Stabilization Act of 1983 to include an assessment on all dairy imports. This will help promotional and educational programs which are funded by producers and not at government expense.
    This past year we have seen heightened awareness of the problems and dangers that different animal diseases can have, not only on the livestock industry, but also on the consuming public. Such diseases such as Bovine Spongiform Encephalopathy (BSE) and foot-and-mouth disease can cause billions of dollars in direct damage to livestock and grain producers, and can have a deleterious affect on consumer buying of meat products. We encourage USDA to continue to prohibit imports of any dairy products from any geographic region that has not been determined by USDA to be free of foot-and-mouth disease. But there are several other steps that need to be taken immediately to ensure that U.S. livestock products and producers are protected from the horrific damages that disease can cause to the livestock and dairy industries
 Page 120       PREV PAGE       TOP OF DOC
    One step would be passage of the Animal Health Protection Act. We appreciate your support, Mr. Chairman and Rep. Peterson, on these issues and look forward to working with you to pass this important legislation this year. Several incidents recently have indicated the need for legislation that clarifies the actions that USDA can take to make sure that the agency can respond rapidly to control possible disease outbreaks, or more importantly, to prevent a disease outbreak. We cannot afford to make USDA wait through various court procedures while a possible disease is breaking out or spreading. It is imperative that USDA is able to act quickly and decisively to ensure that any possible disease outbreaks are quickly contained or prevented.
    Farm Bureau is extremely concerned about the costs that the proposed TMDL rules and the new proposed AFO/CAFO regulations will put on all dairy and livestock producers. The proposed rules will add a great deal of cost to each and every producer in the United States. Producers cannot receive any return on these investment costs, making it even harder for U.S. producers to compete with producers in other countries who do not face these increased costs of production. The proposed rules, according to EPA, are aimed at correcting problems on less than two percent of America's waters. Farm Bureau is very concerned that these regulations will exact a heavy cost from U.S. dairy and livestock producers while having an extremely small benefit to the rest of society.
    Mr. Chairman, Farm Bureau appreciates the opportunity to testify on these issues important to our dairy producers today. We look forward to working with you as you craft a dairy title for the next farm bill.
Statement of Fred A. Douma
    Mr. Chairman and members of the committee, my name is Fred A. Douma and I am a dairy producer operating in San Joaquin County, California. I am testifying today on behalf of Milk Producers Council (MPC), which is a dairy producer trade association with members operating primarily in southern and central California. For the past two decades MPC has been consistent in evaluating and promoting Federal dairy policy that conforms to the following four basic principles:
 Page 121       PREV PAGE       TOP OF DOC
    Dairy producer income should come from the market
Price should be the major factor in adjusting supply and demand
Government should provide a safety net that supports the market price of dairy products, but does not encourage surplus production.
Government should continue to enforce marketing orders that fairly allocate market dollars between producers and processors.
    U.S. dairy policy over the past two decades has for the most part been consistent with these principles. In our opinion, these policies have served producers well. Prior to the 1981 farm bill, the 1977 farm bill utilized a policy of using the support program to actually enhance producer prices as opposed to simply using the support program as a market clearing safety net. The consequence of that policy was unprecedented milk surpluses. It took nearly a decade of difficult economic adjustments and a huge government cow buyout program before the milk supply and demand situation returned to more manageable levels. Hopefully we have learned from that experience.
    Once the massive surpluses of the 1980's were dealt with, the farm bills of the 1990's dealt more with modernizing and fine-tuning the Federal Milk Marketing Order (FMMO) and the Milk Support Price program. While the 1995 farm bill intended to end the dairy support program in 1999, it has been extended because both the industry and the Congress realized that at the current price level of $9.90, the program was acting as the market clearing safety net that it was originally designed to be. Milk Producers Council's strongly supports the continuance of the Support Price Program at the current $9.90 level.
    However, there are two problems with the current operation of the support price program that USDA has the authority to address, which we would like to bring to the attention of the committee.

 Page 122       PREV PAGE       TOP OF DOC
    While Congress specifically establishes the support price, the details of the implementation of the program are left to USDA. During the year 2000, market prices for cheese in particular fell to a point where it was very important for the support program to kick in and provide a safety net. Unfortunately, while USDA did publish and was apparently willing to buy cheese at a price that would enable cheesemakers to pay at least the $9.90 support price to producers, in reality the market price fell far below USDA's published cheese price. As a result, the Federal Order price for milk used to make cheese fell to a totally unacceptable $8.57 per cwt. in November of 2000. In our view, had the support program worked as it should have, the producer price for milk used to make cheese would have stabilized at around the support price level of $9.90 per cwt. and that would have significantly minimized the anxiety that producers, particularly in the heavy cheese producing regions of the country felt in the waning months of 2000. Milk Producers Council would propose two remedies to this problem.
    First, USDA should streamline and modernize its purchase rules so that the Commodity Credit Corporation (CCC) is able to clear the cheese market when a market collapse is imminent. Among the things the CCC needs to revise are product specifications, packaging specifications, and laboratory testing procedures and inspections. In addition, processing plants complained that the CCC was slow to pay for their purchases. USDA has already indicated that they are going to make revisions to these procedures. It would be helpful if the committee indicated to USDA the importance of making sure that the Support Program safety net works effectively.
    Second, USDA should use the support purchase prices for butter, powder and cheese as the minimum market prices in the FMMO pricing formulas. Under the current FMMO formulas, dairy-manufacturing plants report on a weekly basis to USDA the prices they are receiving for butter, powder and cheese. USDA then sets the producer prices based on these market price reports. The formulas give manufacturers a fixed make allowance which remains constant regardless of the market price of the dairy commodity. In effect what this system does is allow manufacturers to almost fully transfer the market price risk to producers. If USDA were to floor the market prices in the FMMO formulas at the support purchase price levels, then manufacturers could not transfer to producers the negative results of the processors decision to sell dairy products on the market at prices below the support purchase prices.
 Page 123       PREV PAGE       TOP OF DOC
    While Congress specifically set the support price at $9.90 per cwt. the decision about what the purchase prices of butter, powder and cheese are, to accomplish that outcome, is left to USDA. Over the past 18 months, the Commodity Credit Corporation has purchased over 600,000,000 pounds of Non Fat Dry Milk through the support program. This level of purchases is very troubling. The purpose of the support program is to be a market clearing safety net. When the CCC begins to purchase nearly one-half of all the NFDM produced in the US, then the program is in danger of triggering the kind of surpluses, at least of a particular product, which could hang over the industry for a long time and undermine the markets ability to recover. It is important to note that a decade ago, when CCC butter purchases where high relative to NFDM purchases, USDA lowered the butter purchase price in a successful effort to stimulate market demand for butter. There are now those who argue that the purchase price of NFDM is too high. We see a lot of merit in that argument. It is our view that a modest adjustment in the butter/powder purchase prices now will allow NFDM to become more competitive in the market place thereby reducing government purchases and expenditures. This can be accomplished while still maintaining the $9.90 per cwt. support price.
    Three times during the last two years Congress has authorized direct payments to producers. While no one is in a position of turning down the money, Milk Producers Council is very troubled by the policy implications of these direct payments. We understand that most of the feed grain programs have historically included direct farmer payments. The low commodity prices of the past four years have necessitated increased payments by the government to help farmers get by. (It is important to note that because most dairy producers buy at least a portion of their feed inputs, low feed commodity prices are of significant benefit to dairy producers.) However, Milk Producers Council does not believe that any type of direct payment should be part of our national dairy policy. Therefore we are opposed to the cash deficiency payment program that is being proposed by National Milk Producers Federation (NMPF). In that proposal a target price of $11.08 per cwt. for milk used to make cheese is established and for every month that the market price does not reach that level, cash payments from the US taxpayer would flow to dairy producers whose milk is used to make cheese. This proposal has several flaws that make it bad dairy policy:
 Page 124       PREV PAGE       TOP OF DOC
    Because this program would limit the impact of low market milk prices on producers, the market signals normally sent when milk is in a surplus condition would be muted. This fact would move US dairy policy further away from market orientation.
    With direct cash government payments taking the pressure of low milk prices off of producers, the incentive for cheese plants to raise the market price of cheese would be minimized further distorting market signals.
    Under current US feed grain policy, low feed costs to dairy farmers make a $11.08 target price profitable for many producers. Having the government guarantee that price would likely stimulate increases in production which would lead to significant milk surpluses.
    Government costs of the dairy program would dramatically increase, which could undermine political support for the legitimate functions of the US dairy program.
    NMPF's own analysis of their proposal indicates that the cost of the deficiency payment program starts at $500 million per year and steadily escalates from there. Their analysis shows that the program stimulates increased production that contributes to continued milk surpluses that keep market prices for cheese low. This in turn causes the annual cost of the deficiency program to escalate about 20% per year. At no time in NMPF's own analysis does supply and demand for cheese balance itself to a point where the deficiency payments would not be needed. To start out with a program, whose proponents own analysis show will cause dairy producers to become permanently addicted to government cash to survive, is policy that should be soundly rejected by Congress.
    Over the past twenty years great progress has been made in bringing the overall milk supply/demand into fairly close balance. Dairy producers in 1998 and 1999 saw very good milk prices and enjoyed significant overall profitability. Not surprisingly, favorable economic times on the dairy farm led to milk production increases, those increases caused the milk price to decline, which sent the clear signal to the industry to adjust production. That adjustment took place during the past 15 months and milk prices are now beginning to recover. The market works and the dairy industry has the opportunity to again prosper because of the fundamental soundness of the policies that have been in place for the past two decades. Now is no time to make a radical change in those policies.
 Page 125       PREV PAGE       TOP OF DOC
    Over the past couple of years there has been a dramatic increase in the importation of a milk type ingredient called Milk Protein Concentrate (MPC) that can be used in many dairy products as a substitute for NFDM. While no doubt some of this rise in imports can be attributed to the higher protein concentration of MPC (over 40% protein) compared to NFDM (33% protein), for the most part according to a GAO study, the importation of this product was caused by a price advantage that was derived because MPC was not covered under the GATT dairy trading rules. The GAO report also discovered that much of the imported MPC, in reality is nothing more than a blend of NFDM (which does have trade restrictions) and some high protein additive. The sole purpose of this blended product is to get around the trade restrictions on NFDM. Milk Producers Council strongly supports efforts to bring Milk Protein Concentrate products under the overall umbrella of the dairy trade provisions of the GATT agreement.
    The Uruguay Round of trade negotiations significantly opened access to the US dairy market. It also significantly limited the amount of product that countries could subsidize for export. Those reductions do appear to have had some positive impact on world market prices for some dairy commodities, however the European Union is still allowed to subsidize, in absolute numbers, significantly more product than the US. Milk Producers Council supports the continuation of the Dairy Export Incentive Program until such time as all subsidized exports are forbidden by trade agreements.
    Milk Producers Council appreciates the opportunity to testify today. We look forward to actively participating with the Committee in the development of the next farm bill. We are convinced that sound, market oriented dairy policy is in the best interests of America's dairy producers, processors and consumers.
Statement of Timothy den Dulk
 Page 126       PREV PAGE       TOP OF DOC

    Chairman Pombo, members of the committee, my name is Timothy den Dulk and my farm office is located in Coopersville, Michigan which is near the shore of Lake Michigan. There I operate a dairy farm and other agricultural activities. In addition I have interests in dairies located elsewhere in Michigan, Indiana, Ohio, New Mexico, and California. I am a founder of Select Milk Producers, Inc., a New Mexico Cooperative with members in New Mexico and west Texas and am a founder, member, and president of Continental Dairy Products, Inc., an Ohio marketing cooperative with members in Ohio, Indiana and Michigan. I am testifying on behalf of Continental, Select and Elite Milk Producers, Inc., a Texas cooperative with producers in west central Texas. Combined these three cooperatives market in excess of 4 billion pounds of milk per year. Milk from these cooperatives is routinely marketed in the middle of the country—upper Midwest, Mideast, Appalachia, Southeast, Southwest, and Central marketing areas. Products made from our members' milk reach all areas of the country and beyond.
    Select Milk Producers is the innovator of on-farm cold membrane (reverse osmosis and ultra-filtration) processing of milk. These processes, which in simple terms, concentrate milk by removing mostly water not only reduce the consumption of fuel in the moving of producer milk but also show the promise of new and exciting markets for milk and milk products not previously available. Select and Elite are operating plants in New Mexico and Texas. Plants in other regions are in various stages of development including one in California either operating at this time or will be soon.
    Personally and on behalf of these cooperatives, I want to express thanks for the honor of being asked to present our views on the Dairy Title of the upcoming farm bill.
    These three cooperatives are members of National Milk Producers Federation and support the fine work that it has done with the dairy conclaves and presentation of testimony before the full committee. Several of their recent initiatives deserve special mention.
 Page 127       PREV PAGE       TOP OF DOC
    NMPF's efforts to address the increased importation of milk protein concentrates (MPC) is superb. Senate bill 827 recently introduced by Senator Dayton of Minnesota represents a well researched, reasoned, and responsible approach to this threat to our dairy industry. It is crafted to bring this relatively new dairy product within the tariffs and quotas that, no doubt, would have been imposed when these rates were last updated nearly twenty years ago.
    There is more to the MPC situation than simply addressing the tariffs and quotas. Questions have been raised about its unlisted use in cheeses. In the case of standardized cheeses such as cheddar, Swiss, and mozzarella, the use of MPC does not come under the standard ingredients or alternative make. Such use should be investigated and, if it is occurring, stopped. The GAO report did not go far enough in that area. Hopefully the Office of Inspector General of USDA or other appropriate office will do the kind of investigation that will either confirm and stop or clear that issue.
    We are strongly opposed to the creation of dairy compacts and other state border trade inhibitions. Due to the location of our members' dairies, the markets of our customers, and the ever shrinking range of markets, the establishment of trade barriers at state borders for any milk is unwarranted and should not be allowed.
    Let me be clear, we do not oppose producers getting their rightful share of the consumer dollar spent on dairy products. We too are producers and we have a like desire and need for adequate income. Opposing dairy compacts is not opposition to dairy producers or their interests, it is opposition to an extremely complex regulatory pricing scheme and governmental agency that is intended, by its design, to promote some dairy farmers over others.
    Make no mistake about it, dairy compacts will result in trade walls that will warp and thwart normal, market-driven movements of milk and milk products. Our coop members, like all producers, seek to market milk at the best possible price. Regular, cyclical changes in supply and demand create special opportunities at specific, narrow periods of time which generally are during the late summer and autumn months of the year. If dairy compacts are in place, producers outside of the regular supply to the compacts would no longer benefit from those market conditions. The reason is that the buyers of milk would be required to pay the added value of our milk into a pool and the income from that pool would be distributed to eligible producers. To be an eligible producer, one needs to ship milk for a period of time which is longer than we would ordinarily be in that market. We would not be eligible and therefore that market would not be available to us. As a result the markets for our milk would shrink and producer prices would be reduced. Thus, the suggestion that compacts are not trade barriers is simply not true. In the past, some of the Federal milk marketing orders had tight qualifications that operated in a similar manner, and, after observing how those provisions interfered with the free flow of milk in commerce, the USDA removed those barriers. Dairy compacts are a step back, not forward.
 Page 128       PREV PAGE       TOP OF DOC
    Some argue that compacts will get interested parties to sit down at the table to discuss prices. As dairy farmers outside of the compact areas, we will not be sitting at the table the compacts create. The ''representatives'' in this milk assembly are appointed from the compact states, our states are not included. These appointed individuals will promote the development of milk production in their state and not ours.
    In contrast, in the marketplace, consumers, processors and producers ''sit down at the table'' every day for an open and free exchange of prices and commodities. Sure, there are times when the prices are not what we want or even need, but the market has a way of correcting for this. Producers, like us, established for the long haul do better with free markets than additional government regulations.
    There is one issue with which NMPF and we disagree—the butter/powder tilt in the dairy price support program. We certainly agree that under today's market and regulatory conditions the $9.90 support provides a valuable safety net to the dairy industry. This price level is sufficient to insure against catastrophic economic conditions while, at the same time, it is not so high that it sends the wrong signals to producers to increase milk production in times of product surplus. However, it is not working that way today. The support price for milk in class IV is derived from the purchase prices of both butter and powder. This is because, in general terms, in making butter, the butterfat is removed leaving skim which is dried to make NFDM. Thus when the Secretary establishes the commodity purchase price for one, it dictates what the other price will be. In different market conditions the relationship between these two can result in different effective support prices paid. As a result the relationship between butter and powder commodity purchase prices must be reviewed and adjusted periodically to respond to present markets in order to maintain the appropriate level of support. Congress recognized this and gave the Secretary the authority to adjust the relationship at least twice a year so as to maintain a $9.90 support price when the government has to intervene in the purchase of either of these products. Today the price for powder is too high, and butter too low. As a result, support for dairy continues even when market prices are at sustainable levels without support. We see no justification for a program that continues to purchase powder at near record levels when the market alone would dictate a price three to four dollars higher than $9.90. Just last week the Secretary reported purchases of over seven million pounds of NFDM with uncommitted inventories of over 560 million pounds even while AMS announced a $14.41 cwt price for class IV for April and all signs are for higher prices yet for May. The most recent report of CCC dairy purchases is attached.
 Page 129       PREV PAGE       TOP OF DOC
    We concerned that the growing government resources unnecessarily spent on this program in these market conditions threatens the continuation of the safety net, or worse, creates a situation when Congress must resort to another milk assessment or similar drastic measure to bring the program into fiscal control.
    More serious is the disparity the butter powder tilt creates between producer milk checks in different regions of the country. Beginning in 2000 class IV prices drive class II and class I when it is higher than class III as has been the case since January 2000. An increase in the price CCC pays for powder not only increases the price on a relatively small amount of class IV produced in the Nation but also increases the prices for class II and class I. Approximately 60 percent of the use is in those three classifications nationwide. Thus, there is price enhancement to those classes above market levels. Distribution of this enhanced price is uneven. While producers in those markets with higher class I and II usage have obtained significant improvements in their income, producers in other areas such as the Upper Midwest and Idaho, predominately ''cheese'' areas, have not so benefitted. Though we may have benefitted in this scenario in the short term, we will lose in the long term.
    It is not so much that others are getting more money that is the problem, but such price enhancement has a long term cost. That is because it impacts supply of milk as well as provides a ceiling on class III prices as processors can rely on powder that is cheaper than producer milk. The costs in terms of reduced producer income will be paid disparately with the cheese milk areas paying more than those who benefitted. Thus the butter powder tilt is not a program that shifts income from consumers and processors to producers, but one that ultimately will primarily shift income from some producers to other producers. It is fundamentally unfair to expect producers to be competitive in a broad national market while, at the same time, implementing Federal policies in such a way that one region has a significant and unfair competitive disadvantage arising out of the unintended result of recent Federal order reform. It should not continue.
 Page 130       PREV PAGE       TOP OF DOC
    We have thus been on record as requesting that the Secretary exercise her statutory authority and correct the tilt by increasing the value of butter in the formula and reducing the value of powder.
    We, like NMPF, are strong supporters of the Federal Milk Marketing Orders. No other dairy program delivers more value to all producers, pooled or not, than this program. It is market driven and fair. Future changes, if any, should be done administratively within the authority of the Secretary and not legislatively.
    Finally, I want to make a general, but extremely important observation about dairy legislation. Our members have invested enormous sums of money in land, equipment, facilities, and cattle as well as investment of human resources. These investments are for the long haul. Today our markets are no longer regional but national, even global. It is thus very important to us, as it should be to all dairy producers, that government policies be done with the long term, not the short term view. We therefore respectfully request that any legislation avoid setting policy to address a momentary phase of the normal supply demand cycle in a limited region of the country, but, instead seek the common good with a long term, national, and coherent policy that promotes innovation, efficiency, and continued growth of the dairy industry of which we are proud to be a part.
Statement of the Australian Dairy Corporation


    What are Milk Proteins? Milk proteins are an essential food ingredient with a diverse range of applications. They are the proteins that occur naturally in milk—one is casein, the other is whey. Milk Protein Concentrate (MPC) contains both casein and whey.
 Page 131       PREV PAGE       TOP OF DOC
    The import of milk proteins in the forms of casein and MPC have been vital in developing a growing market segment for value added milk based products.
    In Australia, MPCs are made by ultra-filtration. They are produced in a dry form to reduce transportation costs and to preserve the products over time. They are essentially equivalent to their liquid Ultra-filtered (UF) milk counterparts.
    Casein imports have a long history dating back to the late 1940's with many food companies in both the dairy and non-dairy sectors relying on continued access. MPC imports have increased over the past five years as the evolution of new products and technologies in the United States has led to increased demand for these products.
    How are Milk Proteins Used in the U.S.? In the United States, milk proteins are used across the dairy and food industries in a wide range of products. These include nutritional products such as adult beverages and infant formulas, confectionary, bakery and convenience foods, and non-standard of identify cheese food products.
    Some of the key benefits of utilising milk proteins as an ingredient are
     High quality
     Diverse end uses because of flavour and functional advantages such as superior nutritional value and reduced lactose levels.
    Imports have driven the development and growth of this sophisticated market segment because of economic disincentives faced by US producers and potential manufacturers. No domestic supply source of casein and MPC is available for most applications. While non-fat dry milk (NFDM) is another potential source of milk protein, it does not have the functional attributes of MPC. It also has the major drawback of containing a significant amount of lactose and relatively little protein.
    As was noted in a recent GAO report: ''Industry executives noted that high-protein milk protein concentrate imports have not displaced domestic milk production because they are filling the growing demand for new nutritional products.''
 Page 132       PREV PAGE       TOP OF DOC
    Restricting imports of casein and MPCs through a tariff rate quota or another form of trade barrier would be counterproductive and ultimately self-defeating. Restrictions would:
    Create a supply chain disruption which would disrupt production schedules and impose an up-front financial cost as companies change formulas and search for alternative inputs.
Create a demand for a vegetable or grain protein substitute with a different functionality and taste profile.
    Once a vegetable protein substitute is included in formulas it will be difficult to replace, partially on cost grounds. This will reduce demand for the milk protein alternative, resulting in lower demand for milk-based products to the long-term detriment of all suppliers.
    Finally, it is important to put the level of imports into perspective. Total milk protein imports between 1995 and 2000 rose by 71 percent. However, across the protein sector as a whole, imports remain at a relatively low level. Casein imports rose by only 13% from 1996 to 2000. The most rapid growth was in MPC imports, which began from a very low base. The greatest growth was in 1998 and 1999 when the MPC imports increased by 70 per cent and by 55 per cent respectively. MPC imports increased by only 17 per cent in 2000—half the volume increase in 1999. In contrast to the consequences of increased NFDM production since 1998—the emergence of sizeable levels of stocks—milk protein imports have had a small influence on the overall market in the U.S. They have created and met demand in diverse applications in which there is limited substitution with available domestic products.
    Imports have created this sophisticated market segment. It is a challenge for the U.S. industry commercially to participate in and fuel growth of this segment rather than seek the ultimately self-defeating option of forcing end-users to seek alternative non-dairy products. Restrictions on imports would also trigger U.S. international trade obligations under the WTO without providing any incentive or ability for U.S producers to supply the market segment with new or existing products.
 Page 133       PREV PAGE       TOP OF DOC
    This paper was prepared by the Australian Dairy Corporation, Level 5, IBM Tower, 60 City Road, Southbank, Victoria 3006, Australia and registered foreign agents Patrick Fazzone, Suite 300, 1747 Pennsylvania Avenue, NW, Washington DC 20006 and Collier Shannon Scott, Suite 400, 3050 K Street, NW, Washington DC 20007.
    [Editor's note: For the testimony of the National Milk Producers Federation, please refer to the committee hearing of April 5, 2001, ''The Future of Federal Farm Commodity Programs'' serial No. 107-2, page 593.]